Exhibit 13.1



OPTICAL CABLE CORPORATION



Annual Report



2004



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TABLE OF CONTENTS



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| |  | -- |  | -------------------------------------------------------
| |  | 2  |  | Selected Financial Information                         
| |  |   
| |  | 4  |  | Letter to Shareholders                                 
| |  |   
| |  | 7  |  | Managements Discussion and Analysis                   
| |  |   
| |  | 20 |  | Financial Statements                                   
| |  |   
| |  | 24 |  | Notes to Financial Statements                          
| |  |   
| |  | 40 |  | Report of Independent Registered Public Accounting Firm
| |  |   
| |  | 41 |  | Managements Statement of Responsibility               
| |  |   
| |  | 42 |  | Corporate Information                                  



1



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Selected Financial Information

(in thousands, except per share data and footnotes)



|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------- | - |  | - | ------ | -
|                                                  |  | Years ended October 31, |       
|                                                  |  | 2004                    |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |        
|Statement of Operations Information:              |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Net sales                                         |  | $                       | 43,218 |   |      | $ | 41,114 |      |  | $ | 42,598 |   |  | $    | 60,405  |   |  | $ | 58,219 |  
|Cost of goods sold                                |  |                         | 26,515 |   |      |   | 26,505 |      |  |   | 27,607 |   |  |      | 35,983  |   |  |   | 30,878 |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Gross profit                                      |  |                         | 16,703 |   |      |   | 14,609 |      |  |   | 14,991 |   |  |      | 24,422  |   |  |   | 27,341 |  
|                                                  |  |                         |        |   |     
|Selling, general and administrative expenses      |  |                         | 15,457 |   |      |   | 13,309 |      |  |   | 13,603 |   |  |      | 17,131  |   |  |   | 15,024 |  
|Shareholder litigation settlement expense (1)     |  |                         |       |   |      |   | 871    |      |  |   | 997    |   |  |      |        |   |  |   |       |  
|Loss on impairment of machinery and equipment (2) |  |                         |       |   |      |   | 117    |      |  |   |       |   |  |      |        |   |  |   |       |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Income from operations                            |  |                         | 1,246  |   |      |   | 312    |      |  |   | 391    |   |  |      | 7,291   |   |  |   | 12,317 |  
|                                                  |  |                         |        |   |     
|Other income (expense):                           |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Gains (losses) on trading securities, net (3)     |  |                         |       |   |      |   |       |      |  |   |       |   |  |      | (11,414 | ) |  |   | 289    |  
|Interest income (expense), net                    |  |                         | (113   | ) |      |   | (159   | )    |  |   | (184   | ) |  |      | (318    | ) |  |   | 173    |  
|Other, net                                        |  |                         | (19    | ) |      |   | 39     |      |  |   | 9      |   |  |      | 9       |   |  |   | (45    | )
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Income (loss) before income tax expense (benefit) |  |                         | 1,114  |   |      |   | 192    |      |  |   | 216    |   |  |      | (4,432  | ) |  |   | 12,734 |  
|                                                  |  |                         |        |   |     
|Income tax expense (benefit) (4)                  |  |                         | 364    |   |      |   | (123   | )    |  |   | (68    | ) |  |      | 2,297   |   |  |   | 4,479  |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Net income (loss)                                 |  | $                       | 750    |   |      | $ | 315    |      |  | $ | 284    |   |  | $    | (6,729  | ) |  | $ | 8,255  |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Net income (loss) per share:                      |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Basic                                             |  | $                       | 0.13   |   |      | $ | 0.05   |      |  | $ | 0.04   |   |  | $    | (0.96   | ) |  | $ | 1.17   |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Diluted                                           |  | $                       | 0.13   |   |      | $ | 0.05   |      |  | $ | 0.04   |   |  | $    | (0.96   | ) |  | $ | 1.16   |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Weighted average shares:                          |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Basic                                             |  |                         | 5,587  |   |      |   | 5,736  |      |  |   | 6,929  |   |  |      | 7,020   |   |  |   | 7,038  |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Diluted                                           |  |                         | 5,618  |   |      |   | 5,744  |      |  |   | 6,929  |   |  |      | 7,043   |   |  |   | 7,095  |  
|                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Balance Sheet Information:                        |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |        |  
|Cash and cash equivalents                         |  | $                       | 4,342  |   |      | $ | 2,337  |      |  | $ | 747    |   |  | $    | 2,088   |   |  | $ | 1,459  |  
|Trading securities                                |  |                         |       |   |      |   |       |      |  |   |       |   |  |      |        |   |  |   | 17,983 |  
|Working capital                                   |  |                         | 15,360 |   |      |   | 14,277 |      |  |   | 15,480 |   |  |      | 14,205  |   |  |   | 31,986 |  
|Total assets                                      |  |                         | 32,113 |   |      |   | 30,185 |      |  |   | 32,674 |   |  |      | 42,798  |   |  |   | 52,688 |  
|Short-term borrowings                             |  |                         |       |   |      |   |       |      |  |   |       |   |  |      | 8,271   |   |  |   | 5,659  |  
|Total shareholders equity                        |  |                         | 27,675 |   |      |   | 26,634 |      |  |   | 28,204 |   |  |      | 27,865  |   |  |   | 43,508 |  

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|(1) | The Company recorded a charge during fiscal year 2003 in the amount of $870,549, representing the costs incurred during the year as a result of the settlement of a consolidated
shareholder class action lawsuit. Of the total charge during 2003, $862,250 resulted from the variable accounting treatment, required by U.S. generally accepted accounting principles, related to warrants to purchase 250,000 shares of the
Companys common stock issued as part of the settlement. The Company recorded a charge during fiscal year 2002 in the amount of $997,112, representing the estimated cost of the settlement of the consolidated shareholder class action lawsuit and
related professional fees incurred, net of insurance proceeds. Of the total charge recorded in 2002, $320,344 resulted from the variable accounting treatment related to the warrants. See note 6 of the notes to the financial statements for further
information on the warrants issued in connection with the litigation settlement.
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|(2) | The Company recorded a charge during fiscal year 2003 in the amount of $117,337 due to a loss on impairment of machinery and equipment in connection with an automation upgrade to
the Companys production lines. See note 4 of the notes to the financial statements for further information on the loss on impairment of machinery and equipment.
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|Optical Cable Corporation |  | 2



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|(3) | In January 2000, at the direction of the Companys former Chairman, President and Chief Executive Officer, the Company began actively buying and selling shares in the Nasdaq
100 Trust, which is designed to closely track the price and yield performance of the Nasdaq 100 stock index. The Companys active trading in the Nasdaq 100 Trust continued through May 14, 2001, the date of the last purchase of these shares. On
October 3, 2001, as part of a policy to invest future excess funds only in short-term interest-bearing investments, the Company sold all of its remaining investment in the Nasdaq 100 Trust and paid off the outstanding margin borrowings. For
accounting purposes, the Company categorized its past investment in the Nasdaq 100 Trust as trading securities, and recorded the investment on its balance sheet at fair value, which was based on quoted market prices. Realized and unrealized net
gains or losses were included in other gains (losses) on trading securities, net, under the other income (expense) section of the statement of operations.
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|(4) | The effect of establishing a valuation allowance against the Companys deferred tax assets relating to the capital loss carryforward generated by the sale of the Companys
trading securities during fiscal year 2001 resulted in an increase in income tax expense of approximately $4.1 million for fiscal year 2001. See note 10 of the notes to the financial statements for further information on income taxes.
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|3 |  | Optical Cable Corporation



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Dear Shareholders:



I am pleased to report to you that your management team continues to focus on delivering resultsbuilding short-term financial performance; building
the critical mass of resources necessary to support future growth; and executing a strategy designed to build increased shareholder value over the long term.



Building Performance



We continue to focus on delivering short-term performance ahead of expectations for the fiber optic cable enterprise market. During fiscal year 2004, the
Optical Cable Corporation team delivered gains in short-term financial performance:



| |  |  | We grew net sales by 5.1% to $43.2 million from $41.1 million the year beforeincreasing net sales within the United States by 5.3% to $35.2 million, and increasing net sales
outside of the United States by 4.5% to $8.0 million.
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| |  |  | We increased gross margins to 38.6% from 35.5% during the prior year. The increase reflects changes in our product mix sold, in part a result of our targeted market segment
initiatives.
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| |  |  | We increased net income to $0.13 per share from $0.05 per share from the year beforeeven as an increase in our effective tax rate significantly impacted net income during the
year. (See note 10 to the financial statements.)
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| |  |  | We increased our cash on hand 85.8% to $4.3 million, and we continue to have no borrowings under our bank credit facility.
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| |  |  | We increased our net book value to $27.7 million and increased our net current assets to $15.4 million.
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| |  |  | We have maintained our position as one of the leading manufacturers of fiber optic cable for the enterprise market in North America. We believe we are positioned as the second
largest manufacturer in terms of volume and net sales for that market.
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Building Critical Mass



We continue building
and maintaining the critical mass of resourcesboth infrastructure and personnelnecessary to support future growth. During fiscal year 2004, we took significant steps toward that goal:



| |  |  | We more than doubled our capital expenditures compared to the previous year, as we upgraded certain existing equipment, added new equipment as needed, and invested in improving
control systems.
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|Optical Cable Corporation |  | 4



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| |  |  | We increased our headcount approximately 10% during the year, adding needed personnel in areas critical to supporting our planned growth. Departments with personnel additions
included production, engineering, sales, quality, and finance. Among our hires are key mid-level managers with significant experience and a history of achievement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In May, we completed a reorganization of our departments. The marketing and sales departments were combined under Charlie Carson, who became our Senior Vice President of Marketing
and Sales. Luke Huybrechts became our Senior Vice President of Operations, with responsibility for production, technology and engineering, and quality. Ted Leonard became our Vice President of Technology and Engineering.
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| |  |  | In July, we announced the addition of John B. Williamson, III to our Board of Directors. John is Chairman of the Board, President and Chief Executive Officer of RGC Resources, Inc.
(Nasdaq NM: RGCO). Already he has been a great asset to Optical Cable.
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Building Longer Term Shareholder Value



We are
executing a strategy designed to build increased shareholder value over the long term. The strategy that has generated our improved results to date remains essentially unchanged: deliver the exceptional services and quality products our customers
have come to expect from Optical Cable Corporation; grow sales by targeting market segments particularly well suited for our rugged fiber optic cable designslike the mining, military, security and industrial markets; continue to assemble and
maintain the critical mass of resources (both infrastructure and personnel) necessary to facilitate and support future sales growth, as well as the creation of increased shareholder value over the long term; and pursue the appropriate opportunities
to grow our partnership and alliance base and to expand our product breadth when such opportunities can offer better solutions to our customers fiber optic communication needs.



As we execute our long term strategy, we recognize the need to generate sufficient returns on our shareholders
investment. To keep managements focus on total shareholder returns, even in the short term, a portion of the equity grants issued to the management team in December 2004 are eligible for vesting over four to six years provided that Optical
Cable Corporations total shareholder return (in terms of stock price and dividends) beats the Russell 2000® Index by at least 20%. Unvested shares will be forfeited.



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|5 |  | Optical Cable Corporation



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Continued Results Focus in 2005



During fiscal year 2005, your management team will continue this focus on results.



We plan to accelerate our sales growth this year, targeting a percentage net
sales increase in the high single digits to the low double digits. However, as in fiscal year 2004, we anticipate that net sales in the first half of the year will be lower than net sales in the second half of the year due to the effects of
seasonality.



We have budgeted $3.0 million in capital
expenditures for continued equipment upgrades and purchases, as well as for the purchase of, and certain integration costs of, an ERP system. Additionally, we will continue to review our staffing requirements as we fill open positions, working to
ensure expenses remain controlled.



During fiscal 2005, we will
be working to comply with Section 404 of Sarbanes-Oxley, which will be required for Optical Cable during fiscal year 2005. We have budgeted for anticipated increases in expenses and personnel needed to ensure our compliance by the end of the year.



Growing Momentum



We are quite proud of what the Optical Cable Corporation team has
accomplished to date; and a momentum is growing. We are committed to continuing this momentumbuilding on our progress and positioning Optical Cable for future growthto ensure the creation of significant future shareholder value.



Thank you for your continued interest in Optical Cable
Corporation.



Neil D. Wilkin, Jr.

Chairman of the Board,

President and Chief Executive Officer





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|Optical Cable Corporation |  | 6



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Managements Discussion and Analysis of Results

of Operations and Financial Condition



Forward-Looking Information



This report may contain certain forward-looking information within the meaning of the federal securities laws. The forward-looking information may include, among other
information, (i) statements concerning our outlook for the future, (ii) statements of belief, anticipation or expectation, (iii) future plans, strategies or anticipated events, and (iv) similar information and statements concerning matters that are
not historical facts. Such forward-looking information is subject to risks and uncertainties that may cause actual events to differ materially from our expectations. Factors that could cause or contribute to such differences include, but are not
limited to, the level of sales to key customers, including distributors; the economic conditions affecting network service providers; corporate spending on information technology; actions by competitors; fluctuations in the price of raw materials
(including optical fiber); our dependence on a single manufacturing facility; our ability to protect our proprietary manufacturing technology; market conditions influencing prices or pricing; our dependence on a limited number of suppliers; an
adverse outcome in litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in regulatory reviews and audits and potential regulatory reviews and audits; further adverse changes in laws
and regulations associated with the extraterritorial income exclusion; adverse changes in state tax laws and/or positions taken by state taxing authorities affecting us; technological changes and introductions of new competing products; economic
conditions that affect the telecommunications sector, certain technology sectors or the economy as a whole; terrorist attacks or acts of war, particularly given the acts of terrorism against the United States and subsequent military responses by the
United States, and any potential future military conflicts; ability to retain key personnel; our ability to successfully implement planned changes to our information technology systems; the impact of changes in accounting policies, including those
by the Securities and Exchange Commission and the Public Company Accounting Oversight Board; our ability to successfully comply with, and the cost of compliance with, the provisions of section 404 of the Sarbanes-Oxley Act of 2002; impact of future
consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; impact of weather or natural disasters in the areas of the world in which we operate and market our products;
changes in market demand, exchange rates, productivity, or market and economic conditions in the areas of the world in which we operate and market our products, and our success in managing the risks involved in the foregoing.



We caution readers that the foregoing list of important factors is not exclusive and we
incorporate by reference those factors included in current reports on Form 8-K.



Amounts presented in the following discussion have been rounded to the nearest hundred thousand, unless the amounts are less than one million, in which case the amounts have been rounded to the nearest thousand.



Overview



During our 2004 fiscal year, we increased net sales 5.1%, increased gross margins and appreciably increased net income, when compared to our
2003 fiscal year. We believe our market segment initiatives and other ongoing initiatives, in addition to improvements in the markets in which we operate have contributed to the increase in net sales during fiscal year 2004 compared to fiscal year
2003. We reported net income in fiscal year 2004 of $750,000, or $0.13 per basic and diluted common share, compared to net income of $315,000, or $0.05 per basic and diluted common share, in fiscal year 2003. We continued to report a positive cash
balance at October 31, 2004, avoiding the need to use our credit facility for either working capital or capital expenditures during the year. Each of these items will be described in further detail later in our discussion.



We are a leading manufacturer of a broad range of tight buffered fiber optic cables for high
bandwidth transmission of data, video and audio communications, primarily sold into the local area network and premises markets, often referred to as the enterprise market. Our fiber optic cables are well-suited for use in various short- to
moderate-distance applications, including applications in the enterprise market.



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|7 |  | Optical Cable Corporation



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We pioneered the design and production of special tight buffered fiber optic cables for the most demanding military field
applications in the early 1980s. At our ISO 9001:2000 registered facility in Roanoke, Virginia, we manufacture a broad range of fiber optic cables that can be used both indoors and outdoors. Our current product portfolio is built on the evolution of
our fundamental technologies and designed to provide end-users with significant value. Uses for our products range from commercial and campus installations to customized products for specialty applications and harsh environments, including military
tactical fiber optic cables.



Our fiber optic cables are easy and economical to
install, provide a high degree of reliability and offer outstanding performance characteristics. We have designed and implemented an efficient, automated manufacturing process based on our proprietary technologies. This enables us to produce high
quality indoor/outdoor tight buffered fiber optic cable rapidly and cost efficiently.



We sell our products internationally and domestically through our sales force to our customers, which include major distributors, regional distributors, various smaller distributors and original equipment manufacturers. For the years ended
October 31, 2004, 2003 and 2002, approximately 81%, 81% and 77%, respectively, of net sales were from customers located in the United States, while approximately 19%, 19% and 23%, respectively, of net sales were from international customers.
Substantially all of our international sales are denominated in U.S. dollars. The lower percentage of international net sales in 2003 compared to 2002 resulted primarily from a nonrecurring large order of one international customer during 2002.
Fluctuations in the percentage of international net sales from period to period occur based on the timing of large international orders, coupled with the impact of increases or decreases in domestic sales. Fluctuations in the timing or magnitude of
international sales may cause our results to differ from our expectations.



Net
sales consist of gross sales of products less discounts, refunds and returns. Revenue is recognized at the time of product shipment or delivery to the customer (including distributors) provided that the customer takes ownership and assumes risk of
loss, based on shipping terms. In fiscal year 2004 and 2003, one major domestic distributor accounted for 16.0% and 14.9% of our net sales, respectively. No single customer accounted for more than 10% of our net sales in fiscal year 2002. Other than
this distributor, no single customer accounted for more than 10% of our net sales in fiscal years 2004, 2003 or 2002.



A significant percentage of the selling price of our fiber optic cable is based on the cost of raw materials used. Single-mode fiber is less expensive than multimode
fiber, and consequently single-mode fiber optic cables have a lower per unit selling price than comparable multimode fiber optic cables. We believe that the long-haul, metropolitan and access markets are predominantly the users of single-mode fiber
optic cable, and that increasingly, single-mode fiber optic cable is also being used for other short- to moderate-distance installations where higher bandwidth is required. However, any trend toward the use of single-mode fiber optic cables in such
other installations may be slowed to the extent that 50 micron 1 gigabit and 10 gigabit multimode fiber optic cables are used to satisfy current bandwidth demands. To the extent that our sales mix shifts toward single-mode cables, we will have to
increase the volume of our sales to maintain our current level of net sales.



Cost of goods sold consists of the cost of materials, compensation costs, product warranty costs and overhead related to our manufacturing operations. The largest percentage of costs included in cost of goods sold is attributable to costs
of materials which are variable costs as opposed to fixed costs.



Selling,
general and administrative expenses, also referred to as SG&A expenses, consist of the compensation costs for sales and marketing personnel, shipping costs, travel expenses, customer support expenses, trade show expenses,
advertising, bad debt expense, the compensation cost for administration, finance and general management personnel, as well as legal and accounting fees and costs incurred to settle litigation or claims and other actions against us, excluding legal
and accounting fees and other costs reflected as shareholder litigation settlement expense.



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|Optical Cable Corporation |  | 8



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Other expense, net consists of interest income, interest expense, and other miscellaneous income and expense items not
directly attributable to our manufacturing operations.



Results of
Operations



The following table sets forth and highlights fluctuations in
selected line items from our statements of operations for the periods indicated:



|              |  |                                |            |               |   |            |                                |       |               |  |   |            |  |   |            |  |      |   
|------------- |  | ------------------------------ | ---------- | ------------- | - | ---------- | ------------------------------ | ----- | ------------- |  | - | ---------- |  | - | ---------- |  | ---- | --
|              |  | Fiscal Years Ended October 31, |            | PercentChange |   |            | Fiscal Years Ended October 31, |       | PercentChange | 
|              |  | 2004                           |            | 2003          |   |            | 2003                           |       | 2002          | 
|Net sales     |  | $                              | 43,200,000 |               | $ | 41,100,000 |                                | 5.1   | %             |  | $ | 41,100,000 |  | $ | 42,600,000 |  | (3.5 | )%
|Gross profit  |  |                                | 16,700,000 |               |   | 14,600,000 |                                | 14.3  |               |  |   | 14,600,000 |  |   | 15,000,000 |  | (2.5 | ) 
|SG&A expenses |  |                                | 15,500,000 |               |   | 13,300,000 |                                | 16.1  |               |  |   | 13,300,000 |  |   | 13,600,000 |  | (2.2 | ) 
|Net income    |  |                                | 750,000    |               |   | 315,000    |                                | 138.4 |               |  |   | 315,000    |  |   | 284,000    |  | 11.0 |   



Net Sales



Net sales increased 5.1% to $43.2 million in fiscal year 2004 from $41.1 million in fiscal
year 2003. As expected, net sales increased sequentially from quarter to quarter during 2004. Quarterly net sales ranged from $9.3 million during the first quarter of 2004 to $11.9 million during the fourth quarter of 2004. The quarterly sequential
increase, we believe, is largely a result of our expected seasonality patterns and is consistent with the pattern of net sales experienced during 2003. Specifically, we expect net sales to be relatively lower in the first half of each fiscal year
and relatively higher in the second half of each fiscal year, which we believe may be partially due to the construction cycles and budgetary considerations of our customers. We believe this pattern will be repeated in fiscal year 2005. We believe
our market segment initiatives and other ongoing initiatives, in addition to improvements in the markets in which we operate, have contributed to the overall increase in sales when comparing fiscal year 2004 to fiscal year 2003. Our forward sales
order load also increased during fiscal year 2004.



During fiscal year 2004, we
experienced an increase in both volumes shipped and in our average selling price per fiber meter compared to 2003. At the same time, we experienced an increase in product mix for cable containing single-mode fiber (which typically has a lower
relative sales price), compared to cable containing multimode fiber (which typically has a higher relative sales price) when compared to 2003. The increase in product mix for cable containing single-mode fiber was not significant enough to outweigh
the increased volumes and increased average selling price.



Cable containing
multimode fiber is generally used for communications over shorter distances where the higher bandwidth capacity and the higher transmission equipment cost of single-mode fiber is not required. Cable containing single-mode fiber is generally used for
communications over longer distances and where higher bandwidth capacity is required.



Net sales decreased 3.5% to $41.1 million in fiscal year 2003 from $42.6 million in fiscal year 2002. Despite the slight decrease for the year, net sales increased sequentially from quarter to quarter during 2003. Quarterly net sales ranged
from $9.7 million during the first quarter of 2003 to $11.3 million during the fourth quarter of 2003.



During fiscal year 2003, our product mix for cable containing multimode fiber (which typically has a higher relative sales price), compared to cable containing single-mode fiber (which typically has a lower relative
sales price), was approximately the same when compared to 2002.



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|9 |  | Optical Cable Corporation



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Gross Profit



Gross profit increased 14.3% to $16.7 million in fiscal year 2004 from $14.6 million in 2003. Gross profit margin, or gross profit as a percentage of net sales, increased
to 38.6% for fiscal year 2004 from 35.5% for 2003. The higher gross profit margins for 2004 generally resulted from the sale of a mix of products with higher margins during fiscal year 2004.



Gross profit decreased 2.5% to $14.6 million in fiscal year 2003 from $15.0 million in 2002.
Gross profit margin, or gross profit as a percentage of net sales, was approximately the same as gross profit margin in the prior year at 35.5% for fiscal year 2003 versus gross profit margin of 35.2% for fiscal year 2002. We continued to see
pressure on pricing as a result of certain industry conditions during fiscal year 2003. We believe the pricing pressure resulted from the continued excess fiber and fiber optic cable manufacturing capacity in the marketplace. Therefore, despite a
slight increase in volumes shipped during the year, net sales declined. The impact of the increased volumes was partially offset by our ability to obtain lower pricing on certain raw materials during the year.



Selling, General and Administrative Expenses



SG&A expenses increased 16.1% to $15.5 million in fiscal year 2004 from $13.3 million in
2003. SG&A expenses as a percentage of net sales were 35.8% in fiscal year 2004 compared to 32.4% in 2003. The higher percentage in fiscal year 2004 reflects the fact that net sales for the period only increased 5.1% compared to 2003, while
SG&A expenses increased 16.1% compared to 2003. The largest element of the net increase in SG&A expenses during 2004 compared to 2003 was compensation costs. Compensation costs have increased as a result of increases in commissions as net
sales have increased, increases in employee incentives targeted to improve financial results and market segment penetration and the hiring of new employees designed to build the critical mass of resources we believe necessary to support anticipated
future sales growth. Other costs that contributed to the increase in SG&A include costs associated with the expensing of restricted stock grants for both members of management and non-employee Directors. As previously disclosed, during fiscal
year 2004 we began using restricted stock grants as management incentives in lieu of stock options. Additionally, during 2004, in accordance with our 2004 Non-employee Directors Stock Plan approved by the shareholders at our annual meeting on March
9, 2004, we began using restricted stock grants as partial compensation for non-employee Directors as payment for Board services in lieu of cash. Generally, restricted stock grants are expensed over the vesting period of the grant, where stock
options have historically not been expensed.



SG&A expenses decreased 2.2%
to $13.3 million in fiscal year 2003 from $13.6 million in 2002. SG&A expenses as a percentage of net sales were 32.4% in fiscal year 2003 compared to 31.9% in 2002. The slightly higher percentage in fiscal year 2003 reflects the fact that net
sales for the period decreased 3.5% compared to 2002, while SG&A expenses only decreased 2.2% compared to 2002. The decrease in SG&A expenses during fiscal year 2003 compared to 2002 results from decreases in certain types of selling costs,
legal and professional fees (excluding those fees related to the shareholder litigation), and bad debt expense, partially offset by increases in compensation costs partially resulting from new hires during the year.



Shareholder Litigation Settlement Expense



We recorded a charge during fiscal year 2003 in the amount of $871,000 representing
additional costs incurred in the settlement of the consolidated shareholder class action lawsuit. Of the total amount expensed, approximately $862,000 represented an increase in the fair value of the warrants to purchase 250,000 shares of our common
stock at an exercise price of $4.88 per share issued in connection with the settlement of the shareholder litigation. U.S. generally accepted accounting principles required the fair value of the warrants to be adjusted at each reporting period until
such time that the following two conditions were met: (i) we were irrevocably obligated to issue the warrants, and (ii) the underlying shares of common stock to be issued on exercise were registered. The second and final of these two conditions was
satisfied on May 19, 2003 when the Securities and Exchange Commission, also referred to as the SEC, declared the registration statement for the underlying shares of



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common stock to be effective. The expense associated with the increase in the fair value of the warrants was a non-cash item and had no impact on our net
cash flow. The warrant expense portion of the shareholder litigation settlement expense was calculated using the Black-Scholes pricing model. The closing price of our common stock of $5.80 on May 19, 2003, the date the registration statement was
declared effective by the SEC, was used in that calculation.



Subsequent to May
19, 2003, no further adjustment of the fair value was or will be required. Therefore, there was no similar charge in fiscal year 2004, and future periods statements of operations will not be impacted by the variable accounting treatment.
During the fiscal year ended October 31, 2003, the fair value of the warrants, net of issuance costs, was reclassified from an accrued liability to permanent equity in accordance with U.S. generally accepted accounting principles.



We recorded a charge during fiscal year 2002 in the amount of $997,000 representing the
estimated cost of the settlement of the consolidated shareholder class action lawsuit and related professional fees incurred during fiscal year 2002, net of insurance proceeds. Of the total amount expensed, approximately $320,000 represented the
fair value of the warrants based on the Black-Scholes pricing model. The closing price of our common stock as of October 31, 2002, of $1.84 per share was used in the calculation for fiscal year 2002.



The shareholder lawsuit is described in more detail in our discussion of Liquidity and
Capital Resources.



Loss on Impairment of Machinery and Equipment



During fiscal year 2003, we recorded a loss on impairment of machinery
and equipment totaling $117,000, due to an automation upgrade initiative. The impairment loss relates to certain machinery and equipment purchased throughout fiscal year 2001 not yet placed into service that is being replaced in conjunction with an
automation upgrade project. The loss is a non-cash item that represents the write-off of the carrying value of the machinery and equipment anticipated to be replaced. There was no such impairment loss during 2004 or 2002.



Other Expense, Net



Other expense, net increased to $132,000 in fiscal year 2004 from $121,000 in 2003. The increase was primarily due to changes in the foreign
currency exchange rate used to settle outstanding foreign accounts receivable during 2004 when compared to 2003, partially offset by an increase in interest income and a decrease in interest expense. Although we did not need to use our credit
facility for either working capital or capital expenditures during fiscal year 2004, we recognized interest expense related to the amortization of the deferred financing costs associated with obtaining and amending our credit facility. The deferred
financing costs are included in other assets, net in the balance sheet and are being amortized to interest expense using the straight-line method, which approximates the effective interest method, over the life of the credit facility. Additional
information describing our credit facility can be found in our discussion of Liquidity and Capital Resources.



Other expense, net decreased to $121,000 in fiscal year 2003 from $175,000 in 2002. This decrease was primarily due to a decrease in interest expense during fiscal year
2003 as a result of lower balances outstanding throughout 2003 compared to 2002 under our bank line of credit, as well as reduced interest rates. During the first quarter of fiscal year 2003, we met certain fixed charge coverage ratio requirements
and the interest rate on our credit facility was reduced from three-quarters of one percent (0.75%) per annum above the prime rate to one-half of one percent (0.50%) per annum above the prime rate. Decreases in the prime rate also resulted in a
lower overall interest rate during 2003 compared to 2002. Additional information describing our credit facility can be found in our discussion of Liquidity and Capital Resources.



Income Before Income Taxes



Income before income taxes was $1.1 million in fiscal year 2004 compared to income before
income taxes of $192,000 in 2003. This increase was primarily due to the increase in gross profit of $2.1 million, a decrease in shareholder litigation settlement expense of $871,000 and a decrease in loss on impairment of machinery and equipment of
$117,000, partially offset by an increase in SG&A expenses of $2.1 million.



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Income before income taxes was $192,000 in fiscal year 2003 compared to income before income taxes of $216,000 in 2002. This decrease was primarily due to
the decrease in gross profit of $382,000 and an increase in loss on impairment of machinery and equipment of $117,000, partially offset by a decrease in SG&A expenses of $294,000, a decrease in shareholder litigation settlement expense of
$127,000 and a decrease in other expense, net, of $55,000.



Income Tax
Expense (Benefit)



Income tax expense totaled $364,000 in fiscal year 2004
compared to income tax benefit of $123,000 in 2003. Our effective tax rate for fiscal year 2004 was 32.7%. Fluctuations in our effective tax rates are due primarily to the amount and timing of the tax benefits related to our Extraterritorial Income
Exclusion, also referred to as EIE, which exempts from federal income taxation a portion of the net profit realized from sales outside the United States of products manufactured in the United States. The EIE is calculated by a complex
analysis of all export sales and profits for the year. Fluctuations in the ratio of export sales and profitability to total sales and profitability create changes in the EIE.



Income tax benefit totaled $123,000 in fiscal year 2003 compared to $68,000 in 2002. Notwithstanding the income before income taxes during
fiscal year 2003, we reported income tax benefit for the year rather than income tax expense, due primarily to the amount and timing of the tax benefits of $208,000 related to our EIE.



The World Trade Organization has ruled against the United States EIE regime. In the ruling the World Trade Organization gave
permission to the European Union to sanction tariffs on certain products manufactured in the United States if the EIE regime was not repealed. The American Jobs Creation Act of 2004, also referred to as the Act, generally repeals the EIE
regime for transactions after December 31, 2004. The Act continues to extend EIE benefits at a reduced rate for two additional years, and continues EIE benefits indefinitely for transactions pursuant to a binding contract in effect on September 17,
2003. The binding contract exception may constitute a violation of the applicable trade agreements because such an exception would maintain EIE benefits. After Congress approved the Act in October 2004, a European Union official indicated that the
European Union might look unfavorably on legislation that contains a transition period. Therefore, it is not certain whether the European Union will terminate its countermeasures upon enactment of the Act, or upon the January 1, 2005 effective date
for the repeal of the EIE regime. As passed, the Act provides transition relief by allowing taxpayers to retain a portion of their otherwise-applicable EIE benefits: 100% for transactions during calendar year 2004, 80% for transactions during
calendar year 2005 and 60% for transactions during calendar year 2006.



Net
Income



Net income increased 138.4% to $750,000 in fiscal year 2004
compared to $315,000 in 2003. This increase was primarily due to the factors previously described as contributing to the increase in income before income taxes, partially offset by the recognition of income tax expense of $364,000 in 2004 compared
to the recognition of income tax benefit of $123,000 in 2003.



Net income
increased 11.0% to $315,000 in fiscal year 2003 compared to $283,000 in 2002. This increase was primarily due to the increase of $55,000 in income tax benefit offset by the factors previously described as contributing to the decrease in income
before income taxes.



Financial Condition



Total assets increased $1.9 million, or 6.4%, to $32.1 million at October 31, 2004, from
$30.2 million at October 31, 2003. This increase was primarily due to a $2.0 million increase in cash and a $522,000 increase in trade accounts receivable, net, partially offset by a $262,000 decrease in income taxes refundable and a $378,000
decrease in deferred income taxes. Further detail regarding the increase in cash is provided in our discussion of



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Liquidity and Capital Resources. Accounts receivable, net, typically fluctuates with increases or decreases in sales and the timing of payments.
Income taxes refundable decreased in 2004 as the Company received income tax refunds during the year of approximately $416,000, net of income taxes paid and deferred income taxes decreased during the year as a result of timing of the reversal of
deferred tax items in accordance with U.S. generally accepted accounting principles.



Total liabilities increased $886,000, or 25.0%, to $4.4 million at October 31, 2004 from $3.6 million at October 31, 2003. This increase was primarily due to an increase in accrued compensation and payroll taxes of $942,000 and an increase
in income taxes payable of $140,000, partially offset by a decrease in accounts payable and accrued expenses of $195,000. The increase in accrued compensation and payroll taxes resulted largely from a change we made in our 401(k) retirement plan
making our contributions discretionary and requiring that our matching contributions to our 401(k) retirement plan be made after calendar year end. The impact of this change results in an increased accrual related to our match at October 31, 2004 of
approximately $480,000. The remaining increase in accrued compensation and payroll taxes relates primarily to increased incentives accrued as a result of improved financial performance. The increase in income taxes payable results from the fact that
we recognized income before income taxes for fiscal year 2004. The decrease in accounts payable and accrued expenses results primarily from the $175,0000 payment during 2004 related to the settlement of the Equal Employment Opportunity
Commissions lawsuit against us, filed on September 27, 2000 and a decrease in customer deposits resulting from sales to one customer during 2004.



Total shareholders equity at October 31, 2004 increased $1.0 million, or 3.9% during fiscal year 2004. The increase resulted from increases in stock-based
compensation totaling $271,000, proceeds from the exercise of warrants to purchase common stock totaling $20,000 and net income retained of $750,000.



Liquidity and Capital Resources



Our primary capital needs during 2004 have been to fund working capital requirements and capital expenditures. Our primary source of capital for these purposes has been
cash provided from operations. As of October 31, 2004 and 2003, we had no outstanding balance under our bank line of credit.



Our cash totaled $4.3 million as of October 31, 2004, an increase of $2.0 million, compared to $2.3 million as of October 31, 2003. We maintain a sweep account
arrangement with our bank, where at the end of each day all of our cash is used to paydown our outstanding note payable to the bank, if any. The increase in cash for the fiscal year ended October 31, 2004, was primarily due to net cash provided by
operating activities of $3.2 million, partially offset by the purchase of property and equipment totaling $1.3 million.



On October 31, 2004, we had working capital of $15.4 million, compared to $14.3 million as of October 31, 2003, which represented an increase of $1.1 million. The ratio
of current assets to current liabilities as of October 31, 2004, was 4.5 to 1, compared to 5.0 to 1 as of October 31, 2003. The increase in working capital during fiscal year 2004 was primarily caused by a $2.0 million increase in cash and a
$522,000 increase in trade accounts receivable, net, partially offset by a $262,000 decrease in income taxes refundable and the $886,000 increase in total liabilities (all of which are current) described previously.



Net cash provided by operating activities was $3.2 million in fiscal year 2004, compared to
$5.2 million in 2003 and $7.2 million in fiscal year 2002. Net cash provided by operating activities during fiscal year 2004 primarily resulted from net income of $750,000 and certain adjustments to reconcile net income to net cash provided by
operating activities, including: depreciation, amortization and accretion of $1.0 million, deferred income tax expense of $378,000 and stock-based compensation expense of $271,000. Additionally, a decrease in income taxes refundable of $262,000 and
an increase in accrued compensation and payroll taxes of $942,000 contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by an
increase in trade accounts receivable of $544,000 and a decrease in accounts payable and accrued expenses and other liabilities of $207,000. Net cash provided by operating activities during fiscal year 2003 primarily resulted from net income of
$315,000, a $578,000 decrease



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in income taxes refundable and a $2.8 million decrease in inventories, partially offset by a $603,000 decrease in accounts payable and accrued expenses
(including accrued compensation and payroll taxes). Net cash provided by operating activities during fiscal year 2002 primarily resulted from net income of $283,000, a $2.5 million decrease in trade accounts receivable and a $4.7 million decrease in
inventories, partially offset by a $2.2 million decrease in accounts payable and accrued expenses (including accrued compensation and payroll taxes).



Net cash used in investing activities totaled $1.3 million in fiscal year 2004, compared to $500,000 in 2003. Net cash used in investing activities during fiscal year
2004 and 2003 resulted entirely from purchases of property and equipment. Net cash provided by investing activities totaled $17,000 in fiscal year 2002. Net cash generated in investing activities during fiscal year 2002 primarily resulted from
$368,000 provided by the receipt of the cash surrender value of a life insurance policy on a former officer, partially offset by $351,000 in purchases of property and equipment. There are no material commitments for capital expenditures as of
October 31, 2004.



Net cash provided by financing activities was $20,000 in
fiscal year 2004, compared to net cash used in financing activities of $3.1 million in 2003, and $8.6 million in 2002. Net cash provided by financing activities in fiscal year 2004 resulted entirely from proceeds received from the exercise of
warrants to purchase our common stock. Net cash used in financing activities in fiscal year 2003 was primarily the result of the repurchase of 21.3% of our outstanding shares of common stock for $2 per share plus brokerage fees. Net cash used in
financing activities in 2002 was the result of repayments on notes payable to our bank under our lines of credit and payments for financing costs related to our credit facility.



We have a revolving credit facility with Wachovia Bank, National Association (formerly First Union National Bank) (Wachovia
Bank). The three-year credit facility provides up to a maximum of $25 million and is collateralized by all of our tangible and intangible assets and is administered by an affiliate of Wachovia Bank. Borrowings under the credit facility are
subject to certain coverage ratios, advance limits and qualifications that are applied to our accounts receivable, inventory and fixed assets. Our ability to access the full amount of the credit facility depends on the future growth of our borrowing
base. As of October 31, 2004, we had no outstanding borrowings under the credit facility, with approximately $12.5 million unused and available.



The credit facility bears interest at one-half of one percent (0.50%) per annum above the prime rate (facility rate of 5.25% as of October 31, 2004). The facility also
provides a LIBOR based rate at our option. In addition, we pay an unused line fee at a rate of one-quarter of one percent (0.25%) per annum on the unused portion, up to $13 million, of the credit facility.



We believe that our cash flow from operations and our credit facility will be adequate to
fund our operations for at least the next twelve months. We anticipate being able to extend our current credit facility prior to its expiration in April of 2005 at terms no less favorable than those of our current facility.



As of October 31, 2004, we have one take or pay agreement to purchase raw optical
fiber. This supply agreement was made in the ordinary course of business. Alternative suppliers exist that could provide this material at a similar cost in the event this supplier is unable or unwilling to perform under the contract. A second
optical fiber supply agreement terminated during fiscal year 2004 in accordance with certain terms of the agreement. See further information related to these supply agreements in our discussion of Contractual Obligations and Commitments.



In four class action lawsuits, filed between November 26, 2001 and January 31,
2002, the Company, Robert Kopstein, our former Chairman, President and Chief Executive Officer, one former officer and director, and one other officer and director, were named as defendants in a consolidated class action lawsuit pending in the
United States District Court for the Western District of Virginia (the Consolidated Suit).



We were able to reach a settlement agreement with the plaintiffs in the Consolidated Suit, and on September 23, 2002, the Court entered an Order and Final Judgment, approving the settlement and dismissing the
Consolidated Suit with prejudice. The settlement provided for a cash payment of $700,000 and the issuance of warrants to purchase 250,000 shares of our common stock at an exercise price per share of $4.88.



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We paid $500,000 of the cash portion of the settlement upon preliminary court approval. The second and final installment, totaling $200,000, of the cash
portion of the settlement was paid on November 1, 2002. The warrants are exercisable for five years. We have registered the shares issuable upon the exercise of the warrants under the Securities Act of 1933, as amended. See also information related
to Shareholder Litigation Settlement Expense, included in our discussion of Results of Operations.



On January 3, 2003, Anicom, Inc., a former customer that is in Chapter 11 bankruptcy, filed a complaint against us in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division, also referred to as the Complaint. The Complaint sought to avoid and recover certain alleged preferential payments in the approximate amount of $1.1 million made to us during the 90-day period
preceding Anicoms bankruptcy filing. We reached an agreement with Anicom to settle this claim in April 2004. The terms of the settlement provided that we pay $10,000 in full settlement of the claim and that we would be allowed an unsecured
non-priority claim against the bankrupt estate in the same amount. On April 26, 2004, we paid $10,000 into an escrow account pending court approval of the settlement. On June 8, 2004, the Court approved the settlement.



During fiscal year 2001, we wrote off approximately $2.2 million for estimated uncollectible
accounts receivable from Anicom. We have received offers to sell our claim against the bankrupt estate. At this time, we have decided not to sell our claim in the bankruptcy proceeding. A subsequent recovery, if any, will be recognized when payment
is received, in accordance with U.S. generally accepted accounting principles.



From time to time, we are involved in various other claims, legal actions and regulatory reviews arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to have a
material adverse effect on our financial position, results of operations or liquidity.



Seasonality



Historically, net sales are relatively lower in
the first half of each fiscal year and relatively higher in the second half of each fiscal year, which we believe may be partially due to construction cycles and budgetary considerations of our customers. For example, an average of approximately 45%
of our net sales occurred during the first half of the fiscal year and an average of approximately 55% of our net sales occurred during the second half of the fiscal year for fiscal years 1996 through 2000. However, our net sales did not follow this
pattern in fiscal year 2002 or 2001. In fiscal years 2002 and 2001, approximately 52% and 57% of our net sales occurred during the first half of the fiscal year, respectively, and approximately 48% and 43% of our net sales occurred during the second
half of the fiscal year, respectively. We believe this shift in the pattern of our net sales appears to be related to overall economic conditions in the industry at the time. During fiscal years 2004 and 2003, approximately 46% and 47%,
respectively, of our net sales occurred during the first half of the fiscal year and approximately 54% and 53%, respectively, of our net sales occurred during the second half of the fiscal year. We believe the pattern of net sales we experienced
during fiscal years 2004 and 2003 reflect a return to the historical seasonality patterns, and we believe we will see a similar pattern in fiscal year 2005.



Contractual Obligations and Commitments



The table below sets forth a summary of our contractual obligations and commitments that will impact our future liquidity:



|                                         |  |                                 |           |      |         |        |          
|---------------------------------------- |  | ------------------------------- | --------- | ---- | ------- | ------ | ---------
|Contractual Obligations and
Commitments  |  | Fiscal years ending October 31,
|                                         |  | 2005                            |           | 2006 |         | Totals
|Long-term optical fiber supply agreement |  | $                               | 2,173,000 |      | 373,000 |        | 2,546,000
|                                         |  |                                 |           |      |         |        |          
|Total                                    |  | $                               | 2,173,000 |      | 373,000 |        | 2,546,000
|                                         |  |                                 |           |      |         |        |          





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Long-Term Optical Fiber Supply Agreements



During fiscal year 2001, we entered into separate long-term supply agreements with two raw optical fiber suppliers. Both supply agreements
were made in the ordinary course of business.



The agreement with the first
optical fiber supplier was amended in December 2002 to significantly reduce the amount of our total fiber purchase commitment. Additionally, this amended supply agreement required that one-half of our aggregate multimode fiber purchases and one-half
of our aggregate single-mode fiber purchases through December 31, 2005 be purchased from that supplier at market prices. The agreement, as amended, was expected to expire on December 31, 2005; however, certain terms of the agreement allowed for
earlier termination in the event that certain conditions were met. This agreement has terminated in accordance with those terms.



An agreement with a second optical fiber supplier was also amended in December 2002 to significantly reduce the amount of our total fiber purchase commitment. This supply
agreement, as amended, sets forth certain quantities to be purchased for calendar years 2003, 2004 and 2005. However, the supply agreement allows us to carry over the purchase commitment of any year to future years without penalty in the event the
target quantities in any year are not met; provided that the aggregate amount of the purchase commitment under the supply agreement must be satisfied by December 31, 2005. This agreement was further amended in August 2004 to indicate that any excess
purchases in any year shall reduce the Companys purchase quantity obligations in future years. The aggregate purchases under this supply agreement (subject to certain future market price adjustments) are included in the previous table assuming
the purchase target quantities are met each year as set forth in the agreement.



We believe that the fiber purchase commitments are consistent with our expected requirements. Additionally, we believe we have adequate alternative sources of fiber in the event this supplier is unable to fulfill its commitment to us. As a
result, we also believe our business is not substantially dependent upon any one optical fiber supplier.



Critical Accounting Policies and Estimates



Our discussion and analysis of financial condition and results of operations is based on the financial statements and accompanying notes that have been prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



Note 1 to the financial statements provides a summary of our significant accounting policies. The following are areas requiring significant judgments and estimates due to
uncertainties as of the reporting date: revenue recognition, trade accounts receivable and the allowance for doubtful accounts, inventories, long-lived assets, and commitments and contingencies.



Application of the critical accounting policies discussed in the section that follows
requires managements significant judgments, often as a result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially
affected. We are not currently aware of any reasonably likely events or circumstances that would result in materially different results.



Revenue Recognition



Management views revenue recognition as a critical accounting estimate since we must estimate an allowance for sales returns for the reporting period. This allowance reduces net sales for the period and is based on
our analysis and judgment of historical trends, identified returns and the potential for additional returns.



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Trade Accounts Receivable and the Allowance for Doubtful Accounts



Management views trade accounts receivable and the related allowance for doubtful accounts
as a critical accounting estimate since the allowance for doubtful accounts is based on judgments and estimates concerning the likelihood that individual customers will pay the amounts included as receivable from them. In determining the amount of
allowance for doubtful accounts to be recorded for individual customers, we consider the age of the receivable, the financial stability of the customer, discussions that may have occurred with the customer and our judgment as to the overall
collectibility of the receivable from that customer. In addition, we establish an allowance for all other receivables for which no specific allowances are deemed necessary. This general allowance for doubtful accounts is based on a percentage of
total trade accounts receivable with different percentages used based on different age categories of receivables. The percentages used are based on our historical experience and our current judgment regarding the state of the economy and the
industry.



Inventories



Management views the determination of the net realizable value of inventories as a critical
accounting estimate since it is based on judgments and estimates regarding the salability of individual items in inventory and an estimate of the ultimate selling prices for those items. Individual inventory items are reviewed and adjustments are
made based on the age of the inventory and our judgment as to the salability of that inventory in order for our inventories to be valued at the lower of cost or net realizable value.



Long-lived Assets



Management views the determination of the carrying value of long-lived assets as a critical accounting estimate since we must determine an estimated economic useful life
in order to properly depreciate our long-lived assets and because we must consider if the value of any of our long-lived assets have been impaired, requiring adjustment to the carrying value.



Economic useful life is the duration of time the asset is expected to be productively
employed by us, which may be less than its physical life. Managements assumptions on wear and tear, obsolescence, technological advances and other factors affect the determination of estimated economic useful life. The estimated economic
useful life of an asset is monitored to determine it continues to be appropriate in light of changes in business circumstances. For example, technological advances or excessive wear and tear may result in a shorter estimated useful life than
originally anticipated. In such a case, we would depreciate the remaining net book value of an asset over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Over the past three years, changes
in economic useful life assumptions have not had a material impact on our reported results.



We must also consider similar issues when determining whether or not an asset has been impaired to the extent that we must recognize a loss on such impairment. For example, during our 2003 fiscal year we recorded a
loss on impairment of machinery and equipment totaling $117,000 due to an automation upgrade initiative which is discussed further in note 4 of the notes to the financial statements.



Commitments and Contingencies



Management views accounting for contingencies as a critical accounting estimate since loss contingencies arising from product warranties and defects, claims, assessments,
litigation, fines and penalties and other sources require judgment as to any probable liabilities incurred. For example, accrued product warranty costs recorded by us are based primarily on historical experience of actual warranty claims as well as
current information on repair costs. Actual results could differ from the expected results determined based on such estimates.



Recent Developments



On December 17, 2004 restricted stock awards totaling 191,000 shares were approved by the Compensation Committee of the Board of Directors. Generally, 80% of the shares will vest based on the passage of time, with



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the corresponding expense recognized ratably over the vesting period. The expense for the time-based shares will equal the number of shares vested during a
period multiplied by the closing price of $5.63 on the date of grant. The first vesting date for the time-based shares will be January 31, 2005 with the maximum vesting period being almost six years. The remaining 20% of the shares are generally
eligible to vest over six years if the management team is able to provide total shareholder return (in terms of increase in share price plus dividends) at least 20% greater than the return on the Russell 2000® index. Greater shareholder returns
can accelerate vesting, but the shares cannot vest more quickly than over four years. The first possible vesting date is October 31, 2005. Failure to meet the performance criteria required for vesting will result in the shares being forfeited. We
will recognize expense on the performance-based shares each quarter using an estimate of the shares expected to vest multiplied by the closing price of $5.63 on the date of grant. U.S. generally accepted accounting principles requires that any
previously recognized compensation cost shall not be reversed if the shares are forfeited as a result of not meeting the performance measure.



Quantitative and Qualitative Disclosures About Market Risk



We do not engage in transactions in derivative financial instruments or derivative commodity instruments. As of October 31, 2004, our financial instruments were not
exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk.



Future Accounting Considerations



In November 2004, the Financial Accounting Standards Board, also referred to as the FASB, issued Statement of Financial Accounting Standards, also referred to
as SFAS No. 151, Inventory Costs  an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) and requires these costs be treated as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are currently evaluating the impact of SFAS No. 151 on our
financial position, results of operations and liquidity.



In December 2004, the
FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. SFAS No. 153 amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, which is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We are currently evaluating the impact of SFAS No. 153 on our financial position, results of
operations and liquidity.



In December 2004, the FASB issued SFAS No. 123
(revised 2004),Share-Based Payment. SFAS No. 123R is a revision of FASB SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS No. 123R



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 18



---

are effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. We are currently evaluating the impact of SFAS No. 123R on our financial position, results of operations and liquidity, but because SFAS No. 123R does not allow for a prospective method of application, we may experience a
negative impact on our financial position and results of operations as early as the fourth quarter of our 2005 fiscal year. The negative impact would be created due to the fact that we have previously issued employee stock options for which no
expense has been recognized which will not be fully vested as of the effective date of SFAS No. 123R.



As of December 31, 2004, there are no other new accounting standards issued, but not yet adopted by us, which are expected to be applicable to our financial position, operating results or financial statement
disclosures.





|   |  |                          
|-- |  | -------------------------
|19 |  | Optical Cable Corporation



---

Balance Sheets

October 31, 2004 and 2003



|                                                                                                                                       |  |             |            |      |   |           
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | ---- | - | ----------
|                                                                                                                                       |  | October 31,
|                                                                                                                                       |  | 2004        |            | 2003
|Assets                                                                                                                                 |  |             |            |      |   |           
|                                                                                                                                       |  |            
|Current assets:                                                                                                                        |  |             |            |      |   |           
|Cash                                                                                                                                   |  | $           | 4,341,956  |      | $ | 2,337,259 
|Trade accounts receivable, net of allowance for doubtful accounts of $464,963 in 2004 and $462,981 in 2003                             |  |             | 8,210,166  |      |   | 7,688,281 
|Income taxes refundable                                                                                                                |  |             |           |      |   | 262,427   
|Other receivables                                                                                                                      |  |             | 83,870     |      |   | 183,600   
|Due from current and former officers, net of allowance for uncollectible advances of $59,078 in 2004 and 2003                          |  |             |           |      |   | 25,167    
|Inventories                                                                                                                            |  |             | 6,548,762  |      |   | 6,624,492 
|Prepaid expenses                                                                                                                       |  |             | 465,894    |      |   | 440,555   
|Deferred income taxes                                                                                                                  |  |             | 146,562    |      |   | 265,963   
|                                                                                                                                       |  |             |            |      |   |           
|Total current assets                                                                                                                   |  |             | 19,797,210 |      |   | 17,827,744
|                                                                                                                                       |  |            
|Other assets, net                                                                                                                      |  |             | 54,663     |      |   | 172,690   
|Property and equipment, net                                                                                                            |  |             | 11,619,254 |      |   | 11,284,205
|Deferred income taxes                                                                                                                  |  |             | 641,780    |      |   | 900,524   
|                                                                                                                                       |  |             |            |      |   |           
|Total assets                                                                                                                           |  | $           | 32,112,907 |      | $ | 30,185,163
|                                                                                                                                       |  |             |            |      |   |           
|Liabilities and Shareholders Equity                                                                                                   |  |             |            |      |   |           
|                                                                                                                                       |  |            
|Current liabilities:                                                                                                                   |  |             |            |      |   |           
|Accounts payable and accrued expenses                                                                                                  |  | $           | 2,343,201  |      | $ | 2,538,203 
|Accrued compensation and payroll taxes                                                                                                 |  |             | 1,954,679  |      |   | 1,012,956 
|Income taxes payable                                                                                                                   |  |             | 139,606    |      |   |          
|                                                                                                                                       |  |             |            |      |   |           
|Total current liabilities                                                                                                              |  |             | 4,437,486  |      |   | 3,551,159 
|                                                                                                                                       |  |            
|Shareholders equity:                                                                                                                  |  |             |            |      |   |           
|Preferred stock, no par value, authorized 1,000,000 shares; none issued and outstanding                                                |  |             |           |      |   |          
|Common stock, no par value, authorized 50,000,000 shares; issued and outstanding 5,608,123 shares in 2004 and 5,459,005 shares in
2003 |  |             | 1,433,351  |      |   | 1,142,006 
|Retained earnings                                                                                                                      |  |             | 26,242,070 |      |   | 25,491,998
|                                                                                                                                       |  |             |            |      |   |           
|Total shareholders equity                                                                                                             |  |             | 27,675,421 |      |   | 26,634,004
|                                                                                                                                       |  |            
|Commitments and contingencies                                                                                                          |  |             |            |      |   |           
|                                                                                                                                       |  |             |            |      |   |           
|Total liabilities and shareholders equity                                                                                             |  | $           | 32,112,907 |      | $ | 30,185,163
|                                                                                                                                       |  |             |            |      |   |           



See accompanying notes to financial
statements.



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 20



---

Statements of Operations

Years ended October 31, 2004, 2003 and 2002



|                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                              |  | Years ended October 31, |           
|                                              |  | 2004                    |            |   | 2003 |   |            | 2002 | 
|Net sales                                     |  | $                       | 43,218,190 |   |      | $ | 41,114,041 |      |  | $ | 42,598,200 |  
|Cost of goods sold                            |  |                         | 26,515,113 |   |      |   | 26,504,631 |      |  |   | 27,607,192 |  
|                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Gross profit                                  |  |                         | 16,703,077 |   |      |   | 14,609,410 |      |  |   | 14,991,008 |  
|                                              |  |                         |           
|Selling, general and administrative expenses  |  |                         | 15,457,144 |   |      |   | 13,308,973 |      |  |   | 13,602,922 |  
|                                              |  |                         |           
|Shareholder litigation settlement expense     |  |                         |           |   |      |   | 870,549    |      |  |   | 997,112    |  
|Loss on impairment of machinery and equipment |  |                         |           |   |      |   | 117,337    |      |  |   |           |  
|                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Income from operations                        |  |                         | 1,245,933  |   |      |   | 312,551    |      |  |   | 390,974    |  
|                                              |  |                         |           
|Other expense, net:                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Interest income                               |  |                         | 23,793     |   |      |   | 9,756      |      |  |   | 32,418     |  
|Interest expense                              |  |                         | (136,527   | ) |      |   | (169,649   | )    |  |   | (216,858   | )
|Other, net                                    |  |                         | (19,181    | ) |      |   | 38,987     |      |  |   | 9,021      |  
|                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Other expense, net                            |  |                         | (131,915   | ) |      |   | (120,906   | )    |  |   | (175,419   | )
|                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Income before income taxes                    |  |                         | 1,114,018  |   |      |   | 191,645    |      |  |   | 215,555    |  
|                                              |  |                         |           
|Income tax expense (benefit)                  |  |                         | 363,946    |   |      |   | (122,962   | )    |  |   | (67,891    | )
|                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Net income                                    |  | $                       | 750,072    |   |      | $ | 314,607    |      |  | $ | 283,446    |  
|                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Net income per share:                         |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic and diluted                             |  | $                       | 0.13       |   |      | $ | 0.05       |      |  | $ | 0.04       |  
|                                              |  |                         |            |   |      |   |            |      |  |   |            |  



See accompanying notes to financial
statements.



|   |  |                          
|-- |  | -------------------------
|21 |  | Optical Cable Corporation



---

Statements of Shareholders Equity

Years ended October 31, 2004, 2003 and 2002



|                                                                    |  |              |   |  |                   |           |   |                            |   |            |   |  |   |            |  
|------------------------------------------------------------------- |  | ------------ | - |  | ----------------- | --------- | - | -------------------------- | - | ---------- | - |  | - | ---------- | -
|                                                                    |  | Common Stock |   |  | Retained Earnings |           |   | Total Shareholders Equity |  
|                                                                    |  | Shares       |   |  | Amount            |           |   |                           
|Balances at October 31, 2001                                        |  | 6,928,910    |   |  | $                 |          |   |                            | $ | 27,865,228 |   |  | $ | 27,865,228 |  
|                                                                    |  |              |   | 
|Stock-based compensation                                            |  |             |   |  |                   | (1,377    | ) |                            |   |           |   |  |   | (1,377     | )
|Tax benefit of disqualifying disposition of stock options exercised |  |             |   |  |                   | 57,412    |   |                            |   |           |   |  |   | 57,412     |  
|Cash payment for fractional shares                                  |  | (258         | ) |  |                   | (722      | ) |                            |   |           |   |  |   | (722       | )
|Net income                                                          |  |             |   |  |                   |          |   |                            |   | 283,446    |   |  |   | 283,446    |  
|                                                                    |  |              |   |  |                   |           |   |                            |   |            |   |  |   |            |  
|Balances at October 31, 2002                                        |  | 6,928,652    |   |  |                   | 55,313    |   |                            |   | 28,148,674 |   |  |   | 28,203,987 |  
|                                                                    |  |              |   | 
|Stock-based compensation                                            |  |             |   |  |                   | 17,857    |   |                            |   |           |   |  |   | 17,857     |  
|Repurchase and retirement of common stock (at cost)                 |  | (1,475,867   | ) |  |                   | (61,624   | ) |                            |   | (2,971,283 | ) |  |   | (3,032,907 | )
|Warrants for common stock, net of issuance costs                    |  |             |   |  |                   | 1,100,107 |   |                            |   |           |   |  |   | 1,100,107  |  
|Exercise of warrants ($4.88 per share)                              |  | 6,220        |   |  |                   | 30,353    |   |                            |   |           |   |  |   | 30,353     |  
|Net income                                                          |  |             |   |  |                   |          |   |                            |   | 314,607    |   |  |   | 314,607    |  
|                                                                    |  |              |   |  |                   |           |   |                            |   |            |   |  |   |            |  
|Balances at October 31, 2003                                        |  | 5,459,005    |   |  |                   | 1,142,006 |   |                            |   | 25,491,998 |   |  |   | 26,634,004 |  
|                                                                    |  |              |   | 
|Stock-based compensation                                            |  | 145,022      |   |  |                   | 271,352   |   |                            |   |           |   |  |   | 271,352    |  
|Exercise of warrants ($4.88 per share)                              |  | 4,096        |   |  |                   | 19,993    |   |                            |   |           |   |  |   | 19,993     |  
|Net income                                                          |  |             |   |  |                   |          |   |                            |   | 750,072    |   |  |   | 750,072    |  
|                                                                    |  |              |   |  |                   |           |   |                            |   |            |   |  |   |            |  
|Balances at October 31, 2004                                        |  | 5,608,123    |   |  | $                 | 1,433,351 |   |                            | $ | 26,242,070 |   |  | $ | 27,675,421 |  
|                                                                    |  |              |   |  |                   |           |   |                            |   |            |   |  |   |            |  



See
accompanying notes to financial statements.



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 22



---

Statements of Cash Flows

Years ended October 31, 2004, 2003 and 2002



|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                        |  | Years ended October 31, |           
|                                                                                        |  | 2004                    |            |   | 2003 |   |            | 2002 | 
|Cash flows from operating activities:                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Net income                                                                              |  | $                       | 750,072    |   |      | $ | 314,607    |      |  | $ | 283,446    |  
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |                         |            |   |      |   |            |      |  |   |            |  
|Depreciation, amortization and accretion                                                |  |                         | 1,049,808  |   |      |   | 1,125,953  |      |  |   | 1,155,807  |  
|Bad debt expense                                                                        |  |                         | 22,029     |   |      |   | 350,266    |      |  |   | 410,425    |  
|Deferred income tax expense (benefit)                                                   |  |                         | 378,145    |   |      |   | (264,588   | )    |  |   | 292,611    |  
|Tax benefit of disqualifying disposition of stock options exercised                     |  |                         |           |   |      |   |           |      |  |   | 57,412     |  
|Stock-based compensation expense (benefit)                                              |  |                         | 271,352    |   |      |   | 17,857     |      |  |   | (1,377     | )
|Noncash shareholder litigation settlement expense                                       |  |                         |           |   |      |   | 862,250    |      |  |   | 320,344    |  
|Loss on impairment of machinery and equipment                                           |  |                         |           |   |      |   | 117,337    |      |  |   |           |  
|(Increase) decrease in:                                                                 |  |                         |            |   |      |   |            |      |  |   |            |  
|Trade accounts receivable                                                               |  |                         | (543,914   | ) |      |   | (243,489   | )    |  |   | 2,472,731  |  
|Income taxes refundable                                                                 |  |                         | 262,427    |   |      |   | 577,586    |      |  |   | 267,994    |  
|Other receivables                                                                       |  |                         | 99,730     |   |      |   | 102,039    |      |  |   | 86,017     |  
|Due from employees, including current and former officers                               |  |                         | 25,167     |   |      |   | 6,300      |      |  |   | 3,551      |  
|Inventories                                                                             |  |                         | 75,730     |   |      |   | 2,787,638  |      |  |   | 4,672,801  |  
|Prepaid expenses                                                                        |  |                         | (25,339    | ) |      |   | 51,646     |      |  |   | (306,370   | )
|Other assets                                                                            |  |                         |           |   |      |   |           |      |  |   | (8,339     | )
|Increase (decrease) in:                                                                 |  |                         |            |   |      |   |            |      |  |   |            |  
|Accounts payable and accrued expenses and other liabilities                             |  |                         | (206,772   | ) |      |   | (756,000   | )    |  |   | (2,546,510 | )
|Accrued compensation and payroll taxes                                                  |  |                         | 941,723    |   |      |   | 153,057    |      |  |   | 61,696     |  
|Income taxes payable                                                                    |  |                         | 139,606    |   |      |   |           |      |  |   |           |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities                                               |  |                         | 3,239,764  |   |      |   | 5,202,459  |      |  |   | 7,222,239  |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities:                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Purchase of property and equipment                                                      |  |                         | (1,255,060 | ) |      |   | (500,115   | )    |  |   | (350,659   | )
|Receipt of cash surrender value of life insurance                                       |  |                         |           |   |      |   |           |      |  |   | 367,469    |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) investing activities                                     |  |                         | (1,255,060 | ) |      |   | (500,115   | )    |  |   | 16,810     |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities:                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Repayments of notes payable to bank, net                                                |  |                         |           |   |      |   |           |      |  |   | (8,271,000 | )
|Payments for financing costs                                                            |  |                         |           |   |      |   | (35,154    | )    |  |   | (308,164   | )
|Cash payment for fractional shares                                                      |  |                         |           |   |      |   |           |      |  |   | (722       | )
|Payments for warrant issuance costs                                                     |  |                         |           |   |      |   | (74,148    | )    |  |   |           |  
|Repurchase of common stock                                                              |  |                         |           |   |      |   | (3,032,907 | )    |  |   |           |  
|Proceeds from exercise of warrants                                                      |  |                         | 19,993     |   |      |   | 30,353     |      |  |   |           |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) financing activities                                     |  |                         | 19,993     |   |      |   | (3,111,856 | )    |  |   | (8,579,886 | )
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                                    |  |                         | 2,004,697  |   |      |   | 1,590,488  |      |  |   | (1,340,837 | )
|                                                                                        |  |                         |           
|Cash and cash equivalents at beginning of year                                          |  |                         | 2,337,259  |   |      |   | 746,771    |      |  |   | 2,087,608  |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents at end of year                                                |  | $                       | 4,341,956  |   |      | $ | 2,337,259  |      |  | $ | 746,771    |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Supplemental disclosure of cash flow information:                                       |  |                         |            |   |      |   |            |      |  |   |            |  
|Cash payments for interest                                                              |  | $                       | 1,776      |   |      | $ | 30,699     |      |  | $ | 148,456    |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Income taxes paid (refunded), net                                                       |  | $                       | (416,232   | ) |      | $ | (435,960   | )    |  | $ | 185,190    |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Noncash investing and financing activities:                                             |  |                         |            |   |      |   |            |      |  |   |            |  
|Capital expenditures accrued in accounts payable                                        |  | $                       | 10,046     |   |      | $ | 13,773     |      |  | $ | 17,910     |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Issuance costs of warrants for common stock reclassified as a reduction of common stock |  | $                       |           |   |      | $ | 8,339      |      |  | $ |           |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Accrued shareholder litigation settlement expense reclassified to shareholders equity  |  | $                       |           |   |      | $ | 320,344    |      |  | $ |           |  
|                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  



See
accompanying notes to financial statements.





|   |  |                          
|-- |  | -------------------------
|23 |  | Optical Cable Corporation



---

Notes to Financial Statements

Years ended October 31, 2004, 2003 and 2002



|(1) | Description of Business and Summary of Significant Accounting Policies
|--- | ----------------------------------------------------------------------



| | (a) | Description of Business
| | --- | -----------------------



Optical Cable Corporation (the Company) is a leading manufacturer of a broad range of tight buffered fiber optic cables for high bandwidth
transmission of data, video and audio communications, primarily sold into the local area network and premises markets, often referred to as the enterprise market. The Companys fiber optic cables are well-suited for use in various short- to
moderate-distance applications, including applications in the enterprise market.



The Company pioneered the design and production of special tight buffered fiber optic cables for the most demanding military field applications in the early 1980s. At its ISO 9001:2000 registered facility in Roanoke,
Virginia, the Company manufactures a broad range of fiber optic cables that can be used both indoors and outdoors. The Companys current product portfolio is built on the evolution of its fundamental technologies and designed to provide
end-users with significant value. Uses for the Companys products range from commercial enterprise and campus installations to customized products for specialized applications and harsh environments, including military tactical fiber optic
cables.



The Companys fiber optic cables are sold
worldwide. Also see note 9.



| | (b) | Cash and Cash Equivalents
| | --- | -------------------------



The Company maintained its primary cash accounts at one commercial bank located in Virginia during 2004 and 2003. Accounts in this bank are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000. As of October 31, 2004 and 2003, the Company had bank deposits in excess of $100,000 totaling $4,240,446 and $2,197,946, respectively.



For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less to be cash equivalents. As of October 31, 2004 and 2003, the Company had no cash equivalents.



| | (c) | Trade Accounts Receivable and Allowance for Doubtful Accounts
| | --- | -------------------------------------------------------------



Trade accounts receivable are recorded at the invoiced amount and do not typically bear interest. The allowance for doubtful accounts is the
Companys best estimate of the amount of probable credit losses in the Companys existing accounts receivable. The Company reviews outstanding trade accounts receivable at the end of each quarter and records allowances for doubtful
accounts as deemed appropriate for (i) certain individual customers and (ii) for all other trade accounts receivable in total. In determining the amount of allowance for doubtful accounts to be recorded for individual customers, the Company
considers the age of the receivable, the financial stability of the customer, discussions that may have occurred with the customer and managements judgment as to the overall collectibility of the receivable from that customer. In addition, the
Company establishes an allowance for all other receivables for which no specific allowances are deemed necessary. This general allowance for doubtful accounts is based on a percentage of total trade accounts receivable with different percentages
used based on the different age categories of receivables. The percentages used are based on the Companys historical experience and managements current judgment regarding the state of the economy and the industry. Account balances are
charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 24



---

| | (d) | Inventories
| | --- | -----------



Inventories of raw materials and production supplies are stated at the lower of cost (specific identification for optical fibers and first-in, first-out
for other raw materials and production supplies) or market. Inventories of work in process and finished goods are stated at average cost, which includes raw materials, direct labor and manufacturing overhead. Also see note 3.



| | (e) | Property and Equipment
| | --- | ----------------------



Property and equipment are stated at cost. Depreciation and amortization are provided for using both straight-line and declining balance methods over the
estimated useful lives of the assets. Estimated useful lives are thirty-nine years for buildings and improvements and three to seven years for machinery and equipment and furniture and fixtures. Also see note 4.



External direct costs of materials and services consumed in developing or
obtaining internal use computer software; payroll and payroll-related costs for employees who are directly associated with and who devote time to an internal use computer software project, to the extent of the time spent directly on the project; and
interest costs incurred when developing computer software for internal use are capitalized.



| | (f) | Revenue Recognition
| | --- | -------------------



Revenue is recognized at the time of product shipment or delivery to the customer, and the customer takes ownership and assumes risk of loss based on
shipping terms.



| | (g) | Shipping and Handling Costs
| | --- | ---------------------------



Shipping and handling costs include the costs incurred to physically move finished goods from the Companys warehouse to the customers
designated location and the costs to store, move and prepare the finished goods for shipment. All amounts billed to a customer in a sale transaction related to shipping and handling are classified as sales revenue. Shipping and handling costs of
approximately $1,743,000, $1,462,000, and $1,565,000 are included in selling, general and administrative expenses for the years ended October 31, 2004, 2003 and 2002, respectively.



| | (h) | Income Taxes
| | --- | ------------



Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Also see note 10.



| | (i) | Impairment or Disposal of Long-Lived Assets
| | --- | -------------------------------------------



Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. When applicable, assets to be disposed of are reported separately in the balance
sheet at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.



|   |  |                          
|-- |  | -------------------------
|25 |  | Optical Cable Corporation



---

| | (j) | Stock Option Plan and Other Stock Options
| | --- | -----------------------------------------



Through October 31, 2003, the Company applied the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations for employee stock option grants, including stock option grants to outside members of the Board of Directors, and by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensationissued by the Financial Accounting Standards Board (the FASB) and by Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, for nonemployee stock option grants.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure. SFAS No. 148 amended existing accounting literature to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The statement also requires
additional disclosures in both interim and annual financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. Effective November 1, 2003, the Company adopted the prospective
method of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation as allowed under SFAS No. 148. The prospective method requires the Company to apply the recognition provisions to all
employee awards granted, modified, or settled after the beginning of the fiscal year in which the recognition provisions are first applied. During the year ended October 31, 2004, the Company did not grant modify or settle any employee stock options
or other awards that would require accounting treatment different from that under APB 25; therefore, there was no impact from the adoption of this statement on the financial statements of the Company.



Since all previously issued employee stock options were accounted for under
APB No. 25, no compensation costs for grants of options to employees has been recognized, as all employee stock options under the stock-based compensation plan had an exercise price equal to or greater than the fair market value of the underlying
common stock at the date of grant. The following table illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The fair
value of each option was estimated at the grant date using the Black-Scholes valuation model for the periods presented.



|                                                                                                                              |  |                         |         |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                                                              |  | Years ended October 31, |        
|                                                                                                                              |  | 2004                    |         | 2003 |   |          | 2002 | 
|Net income as reported                                                                                                        |  | $                       | 750,072 |      | $ | 314,607  |      |  | $ | 283,446  |  
|Less total stock-based employee compensation expense determined under the fair value based method, net of related tax effects |  |                         | 572,594 |      |   | 640,781  |      |  |   | 576,228  |  
|                                                                                                                              |  |                         |         |      |   |          |      |  |   |          |  
|Pro forma net income (loss)                                                                                                   |  | $                       | 177,478 |      | $ | (326,174 | )    |  | $ | (292,782 | )
|                                                                                                                              |  |                         |         |      |   |          |      |  |   |          |  
|Net income (loss) per share:                                                                                                  |  |                         |         |      |   |          |      |  |   |          |  
|Basic and diluted:                                                                                                            |  |                         |         |      |   |          |      |  |   |          |  
|As reported                                                                                                                   |  | $                       | 0.13    |      | $ | 0.05     |      |  | $ | 0.04     |  
|                                                                                                                              |  |                         |         |      |   |          |      |  |   |          |  
|Pro forma                                                                                                                     |  | $                       | 0.03    |      | $ | (0.06    | )    |  | $ | (0.04    | )
|                                                                                                                              |  |                         |         |      |   |          |      |  |   |          |  



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 26



---

| | (k) | Net Income Per Share
| | --- | --------------------



Basic net income per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the net income of the Company. Also see note 12.



| | (l) | Comprehensive Income
| | --- | --------------------



SFAS No. 130, ReportingComprehensive Income, establishes standards for reporting and display of comprehensive income and its components in
a full set of financial statements. The Company has no items of other comprehensive income in any period presented.



| | (m) | Commitments and Contingencies
| | --- | -----------------------------



Liabilities for loss contingencies arising from product warranties and defects, claims, assessments, litigation, fines and penalties and other sources are
recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.



| | (n) | Use of Estimates
| | --- | ----------------



The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.



|(2) | Allowance for Doubtful Accounts for Trade Accounts Receivable
|--- | -------------------------------------------------------------



A summary of changes in the allowance for doubtful accounts for trade accounts receivable for the years ended October 31, 2004, 2003 and 2002 follows:



|                              |  |                         |         |   |      |   |          |      |  |   |          |  
|----------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                              |  | Years ended October 31, |        
|                              |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|Balance at beginning of year  |  | $                       | 462,981 |   |      | $ | 476,124  |      |  | $ | 572,853  |  
|Bad debt expense              |  |                         | 22,029  |   |      |   | 350,266  |      |  |   | 410,425  |  
|Losses charged to allowance   |  |                         | (27,629 | ) |      |   | (412,721 | )    |  |   | (507,949 | )
|Recoveries added to allowance |  |                         | 7,582   |   |      |   | 49,312   |      |  |   | 795      |  
|                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Balance at end of year        |  | $                       | 464,963 |   |      | $ | 462,981  |      |  | $ | 476,124  |  
|                              |  |                         |         |   |      |   |          |      |  |   |          |  



A prior distributor
for the Company filed for protection from its creditors under bankruptcy laws in January 2001. The Company wrote off approximately $2,191,000 for estimated uncollectible accounts receivable from this distributor for the year ended October 31, 2001.
The Company has received offers to sell its claim against the bankrupt estate. At this time, the Company has decided not to sell its claim in the bankruptcy proceeding. A subsequent recovery, if any, will be recognized when payment is received, in
accordance with U.S. generally accepted accounting principles. Also see note 9.



|   |  |                          
|-- |  | -------------------------
|27 |  | Optical Cable Corporation



---

|(3) | Inventories
|--- | -----------



Inventories as of October 31, 2004 and 2003 consist of the following:



|                    |  |             |           |      |   |          
|------------------- |  | ----------- | --------- | ---- | - | ---------
|                    |  | October 31,
|                    |  | 2004        |           | 2003
|Finished goods      |  | $           | 1,982,113 |      | $ | 2,767,259
|Work in process     |  |             | 1,210,748 |      |   | 1,119,160
|Raw materials       |  |             | 3,284,415 |      |   | 2,661,445
|Production supplies |  |             | 71,486    |      |   | 76,628   
|                    |  |             |           |      |   |          
|                    |  | $           | 6,548,762 |      | $ | 6,624,492
|                    |  |             |           |      |   |          



During fiscal year
2001, the Company entered into separate long-term supply agreements with two raw optical fiber suppliers. Both supply agreements were made in the ordinary course of business.



The agreement with the first optical fiber supplier was amended in December 2002 to significantly reduce the amount of the
Companys total fiber purchase commitment. Additionally, this amended supply agreement required that one-half of our aggregate multimode fiber purchases and one-half of our aggregate single-mode fiber purchases through December 31, 2005 be
purchased from that supplier at market prices. The agreement, as amended, was expected to expire on December 31, 2005; however, certain terms of the agreement allowed for earlier termination in the event that certain conditions were met. This
agreement terminated during fiscal year 2004 in accordance with those terms.



An agreement with the second optical fiber supplier was also amended in December 2002 to significantly reduce the amount of the Companys fiber purchase commitment. This supply agreement, as amended, sets forth
certain quantities to be purchased for calendar years 2004 and 2005. However, the supply agreement allows the Company to carry over the purchase commitment of any year to future years without penalty in the event the target quantities in any year
are not met; provided that the aggregate amount of the purchase commitment under the supply agreement must be satisfied by December 31, 2005. This agreement was further amended in August 2004 to indicate that any excess purchases in any year shall
reduce the Companys purchase quantity obligations in future years. The aggregate purchases under this supply agreement (subject to certain future market price adjustments) are included in the following table assuming the purchase target
quantities are met each year as set forth in the agreement.



The aggregate purchases required related to the remaining supply agreement, as amended, for each of the fiscal years subsequent to October 31, 2004 are approximated as follows (subject to certain future market price adjustments and assuming
the annual target purchase quantities are met):



|                               |  |        |          
|------------------------------ |  | ------ | ---------
|Fiscal year ending October 31, |  | Amount
|2005                           |  | $      | 2,173,000
|2006                           |  |        | 373,000  
|                               |  |        |          
|Total                          |  | $      | 2,546,000
|                               |  |        |          



The aggregate
purchases related to the remaining agreement, as amended, totaled approximately $2.4 million for the year ended October 31, 2004. The aggregate purchases related to both agreements, as amended, totaled approximately $5.8 million, and $6.7 million
for the years ended October 31, 2003 and 2002, respectively.



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 28



---

|(4) | Property and Equipment, Net
|--- | ---------------------------



Property and equipment, net as of October 31, 2004 and 2003 consists of the following:



|                                               |  |             |            |   |      |   |            |  
|---------------------------------------------- |  | ----------- | ---------- | - | ---- | - | ---------- | -
|                                               |  | October 31, |           
|                                               |  | 2004        |            |   | 2003 |  
|Land                                           |  | $           | 2,745,327  |   |      | $ | 2,745,327  |  
|Building and improvements                      |  |             | 6,919,634  |   |      |   | 6,919,634  |  
|Machinery and equipment                        |  |             | 10,571,705 |   |      |   | 9,483,705  |  
|Furniture and fixtures                         |  |             | 840,210    |   |      |   | 839,257    |  
|Construction in progress                       |  |             | 455,212    |   |      |   | 279,059    |  
|                                               |  |             |            |   |      |   |            |  
|Total property and equipment, at cost          |  |             | 21,532,088 |   |      |   | 20,266,982 |  
|                                               |  |            
|Less accumulated amortization and depreciation |  |             | (9,912,834 | ) |      |   | (8,982,777 | )
|                                               |  |             |            |   |      |   |            |  
|Property and equipment, net                    |  | $           | 11,619,254 |   |      | $ | 11,284,205 |  
|                                               |  |             |            |   |      |   |            |  



As of October 31,
2004 and 2003, machinery and equipment totaling $339,372 and $912,685, respectively, represents machinery and equipment purchased for expansion in 2001, which is ready for service but has not yet been placed into service due to a reduction in
product demand.



During the fiscal year ended October 31,
2003, the Company recorded a loss on impairment of machinery and equipment totaling $117,337 due to an automation upgrade initiative. The impairment loss relates to certain of the machinery and equipment not yet placed into service that the Company
anticipated would be replaced in conjunction with the automation project. The loss represents the write-off of the carrying value of this machinery and equipment.



|(5) | Product Warranties
|--- | ------------------



The Company generally warrants its products against certain manufacturing and other defects in material and workmanship. These product warranties are
provided for specific periods of time and are applicable assuming the product has not been subjected to misuse, improper installation, negligence or shipping damage. As of October 31, 2004 and 2003, the Companys accrual for estimated product
warranty claims totaled $150,000 and is included in accounts payable and accrued expenses. The accrued product warranty costs are based primarily on historical experience of actual warranty claims as well as current information on repair costs.
Warranty claims expense for the years ended October 31, 2004 and 2003 totaled $227,780 and $398,441, respectively.



The following table summarizes the changes in the Companys accrual for product warranties during the fiscal years ended October 31, 2004 and 2003:



|                                                                 |  |                         |          |   |      |          |  
|---------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | -------- | -
|                                                                 |  | Years ended October 31, |         
|                                                                 |  | 2004                    |          |   | 2003 |         
|Balance at beginning of year                                     |  | $                       | 150,000  |   |      | 100,000  |  
|Liabilities accrued for warranties issued during the year        |  |                         | 270,193  |   |      | 321,260  |  
|Warranty claims paid during the period                           |  |                         | (227,780 | ) |      | (348,441 | )
|Changes in liability for pre-existing warranties during the year |  |                         | (42,413  | ) |      | 77,181   |  
|                                                                 |  |                         |          |   |      |          |  
|Balance at end of year                                           |  | $                       | 150,000  |   |      | 150,000  |  
|                                                                 |  |                         |          |   |      |          |  



|(6) | Warrants and Shareholder Litigation Settlement
|--- | ----------------------------------------------



In four class action lawsuits, filed between November 26, 2001 and January 31, 2002, the Company, Robert Kopstein, the Companys former Chairman,
President and Chief Executive Officer, and one former



|   |  |                          
|-- |  | -------------------------
|29 |  | Optical Cable Corporation



---

officer and director, and one other officer and director were named as defendants in a consolidated class action lawsuit pending in the United States
District Court for the Western District of Virginia (the Consolidated Suit). In the Consolidated Suit, the plaintiffs purported to represent purchasers of the Companys common stock during the period ranging from June 14, 2000
through September 26, 2001 (the class period), and alleged that the defendants violated Sections 10(b) and 20 of the federal Securities Exchange Act of 1934 in making certain alleged misrepresentations and/or omitting to disclose material facts. The
plaintiffs in the Consolidated Suit sought compensatory damages in an unspecified amount, as well as reasonable costs and expenses incurred in the cause of action, including attorneys fees and expert fees.



The Company was able to reach a settlement with the plaintiffs in the
Consolidated Suit, and on September 23, 2002, the Court entered an Order and Final Judgment, approving the settlement and dismissing the Consolidated Suit with prejudice. The Order and Final Judgment was subject to appeal for 30 days after being
entered. Since no appeal was filed with the Court within 30 days, the settlement became final and binding. The settlement provided for a cash payment of $700,000 and the issuance of warrants to purchase 250,000 shares of the Companys common
stock at an exercise price per share of $4.88.



The Company
paid $500,000 of the cash portion of the settlement upon preliminary court approval. The second and final installment, totaling $200,000, of the cash portion of the settlement was paid on November 1, 2002.



The Company recorded a charge during fiscal year 2002 in the amount of
$997,112, representing the estimated cost of the settlement of the Consolidated Suit and related professional fees incurred, net of insurance proceeds. Of the total charge recorded in 2002, $320,344 resulted from the variable accounting treatment
related to the warrants.



The Company recorded a charge during
fiscal year 2003 in the amount of $870,549, representing additional costs incurred during the year as a result of the settlement of the Consolidated Suit. Of the total charge during 2003, $862,250 resulted from the variable accounting treatment,
required by U.S. generally accepted accounting principles, related to the warrants issued as part of the settlement.



U.S. generally accepted accounting principles required the fair value of the warrants to be adjusted at each reporting period until such time that the
following two conditions were met: (i) the Company was irrevocably obligated to issue the warrants, and (ii) the underlying shares of common stock to be issued on exercise were registered. The second and final of these two conditions was satisfied
on May 19, 2003 when the Securities and Exchange Commission (the SEC) declared the registration statement of the underlying shares of common stock to be effective. During the fiscal years ended October 31, 2003 and 2002, the Company
recorded $862,250 and $320,344, respectively, of noncash expense resulting from the variable accounting treatment of the warrants as the price of the Companys common stock increased through May 19, 2003. The expense is a noncash item and has
no impact on the Companys net cash flow.



The warrant
expense portion of the shareholder litigation settlement expense was calculated using the Black-Scholes pricing model. The closing price of the Companys common stock of $5.80 on May 19, 2003, the date the registration statement was declared
effective by the SEC, was used in that calculation.



During
fiscal year 2003, the Company issued 250,000 warrants to purchase shares of common stock to class members defined in the Consolidated Suit in accordance with the settlement agreement approved by the United States District Court for the Western
District of Virginia on September 23, 2002. Each warrant entitles the holder to purchase one share of the Companys common stock at an exercise price of $4.88 per share. The warrants will expire October 24, 2007.



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 30



---

After May 19, 2003, no further adjustment of the fair value was or will be required. Therefore, the
statement of operations for the fiscal year ended October 31, 2004 was not impacted and future periods statements of operations will not be impacted by the variable accounting treatment.



During the fiscal year ended October 31, 2003, the fair value of the
warrants, net of issuance costs, was reclassified from an accrued liability to permanent equity in accordance with U.S. generally accepted accounting principles. The fair value of the 250,000 warrants, totaling $1,182,594, net of issuance costs of
$82,487, as of October 31, 2003, is included in common stock in the shareholders equity section of the accompanying balance sheet.



Warrant activity for the years ended October 31, 2004 and 2003 is as follows:



|                            |  |                 |   |  |                                |     
|--------------------------- |  | --------------- | - |  | ------------------------------ | ----
|                            |  | Number ofshares |   |  | Weighted-averageexercise price
|Balance at October 31, 2002 |  |                |   |  | $                              |    
|                            |  |                
|Granted                     |  | 250,000         |   |  |                                | 4.88
|Exercised                   |  | (6,220          | ) |  |                                | 4.88
|Forfeited                   |  | (3              | ) |  |                                | 4.88
|                            |  |                 |   |  |                                |     
|                            |  |                
|Balance at October 31, 2003 |  | 243,777         |   |  |                                | 4.88
|Exercised                   |  | (4,096          | ) |  |                                | 4.88
|Forfeited                   |  | (1              | ) |  |                                | 4.88
|                            |  |                 |   |  |                                |     
|Balance at October 31, 2004 |  | 239,680         |   |  | $                              | 4.88
|                            |  |                 |   |  |                                |     



|(7) | Note Payable to Bank
|--- | --------------------



The Company has a revolving credit facility with Wachovia Bank, National Association (Wachovia). The three-year credit facility, which expires
in April 2005, provides up to a maximum of $25 million and is collateralized by all of the Companys tangible and intangible assets and is administered by an affiliate of Wachovia. Borrowings under the credit facility are subject to certain
coverage ratios, advance limits and qualifications that are applied to the Companys accounts receivable, inventory and fixed assets. The Companys ability to access the full amount of the credit facility depends on the future growth of
the Companys borrowing base. The Company maintains a sweep arrangement with its bank, where at the end of each day, all of the Companys cash is used to paydown its outstanding note payable to the bank, if any. As of October 31, 2004, the
Company had no outstanding borrowings under the credit facility, with approximately $12,481,000 unused and available. As of October 31, 2003, the Company had no outstanding borrowings under the credit facility.



The credit facility bears interest at one-half of one percent (0.50%) per
annum above the prime rate (facility rate of 5.25% as of October 31, 2004). The facility also provides a LIBOR based rate at the Companys option.



In connection with obtaining and amending the credit facility described above, the Company incurred various costs totaling $35,154 and $308,164 during the
fiscal years ended October 31, 2003 and 2002, respectively. These financing costs have been deferred and are included in other assets, net in the accompanying balance sheets. These deferred financing costs are being amortized to interest expense
using the straight-line method, which approximates the effective interest method, over the life of the credit facility.



|(8) | Employee Benefits
|--- | -----------------



The Company contracts for health insurance coverage for employees and their dependents through third-party administrators. During the years ended October
31, 2004, 2003 and 2002, total expense of $1,113,760, $1,044,402, and $1,223,403, respectively, was incurred under the Companys insured health care program.



|   |  |                          
|-- |  | -------------------------
|31 |  | Optical Cable Corporation



---

The Company maintains a 401(k) retirement savings plan for the benefit of its eligible employees.
Substantially all of the Companys employees who meet certain service and age requirements are eligible to participate in the plan. Through December 31, 2003, Company matching contributions were two dollars for every one dollar contributed by
an employee up to 4% of the employees annual compensation. Effective January 1, 2004, the Company adopted a new plan document which provides that the Companys matching contributions will be discretionary. Effective January 1, 2004, the
Companys matching contributions are two dollars for every one dollar contributed by an employee up to a maximum match of $5,000 and $0.50 for every one dollar contributed by an employee thereafter up to a maximum total match of $10,000. The
new plan document also provides that the matching contributions made by the Company will be based on deferral contributions made during the entire plan year as opposed to each individual payroll period. Therefore, the matching contributions will be
paid subsequent to the last day of the plan year and have been accrued as accrued compensation and payroll taxes in the accompanying October 31, 2004 balance sheet. The Company made or accrued matching contributions to the plan of $519,870,
$337,686, and $437,132 for the years ended October 31, 2004, 2003 and 2002, respectively.



The Company adopted on March 1, 1996 the Optical Cable Corporation 1996 Stock Incentive Plan (the Plan). The Plan is intended to provide a
means through the use of stock incentives that the Company can increase the personal financial interest employees have in the future success of the Company, thereby stimulating the efforts of these employees and strengthening their desire to remain
with the Company. The Company has reserved 750,000 shares of common stock for issuance pursuant to incentive awards under the Plan. As of October 31, 2004, there were approximately 191,000 remaining shares available for grant under the Plan. Through
the end of fiscal year 2004, options granted under the plan have terms ranging from 4 to 10 years, and generally vest 25% after two years, 50% after three years, 75% after four years and 100% after five years or in equal quarterly installments over
five years, with certain option grants vesting in equal monthly installments over four years.



No stock options were granted under the Plan during 2004 or 2003. The per share weighted-average estimated fair value of stock options granted during 2002 was $6.97 on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: no expected cash dividend yield, risk-free interest rate of 5.15%, expected volatility of 134.6% and an expected life of 9 years.



During 2002 the Board of Directors approved grants of stock options outside
of the Plan to those outside members of the Board of Directors who had not served as an executive officer of the Company during the past year. These stock options were for the purchase of an aggregate of 3,123 shares of the Companys common
stock at an exercise price of $7.12 per share, the closing price at the date of the grant. These options vested monthly over one year. The per share estimated fair value of stock options granted to these outside members of the Board of Directors was
$6.87 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no expected cash dividend yield, risk-free interest rate of 5.34%, expected volatility of 133.6% and an expected life of 9 years.



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 32



---

Stock option activity for the years ended October 31, 2004, 2003 and 2002 is as follows:



|                                              |  |                 |   |  |                                |      
|--------------------------------------------- |  | --------------- | - |  | ------------------------------ | -----
|                                              |  | Number ofshares |   |  | Weighted-averageexercise price
|Stock options outstanding at October 31, 2001 |  | 126,695         |   |  | $                              | 55.76
|                                              |  |                
|Granted                                       |  | 347,935         |   |  |                                | 7.43 
|Exercised                                     |  |                |   |  |                                |     
|Forfeited                                     |  | (59,322         | ) |  |                                | 21.73
|                                              |  |                 |   |  |                                |      
|Stock options outstanding at October 31, 2002 |  | 415,308         |   |  |                                | 20.13
|                                              |  |                
|Granted                                       |  |                |   |  |                                |     
|Exercised                                     |  |                |   |  |                                |     
|Forfeited                                     |  | (28,063         | ) |  |                                | 27.49
|                                              |  |                 |   |  |                                |      
|Stock options outstanding at October 31, 2003 |  | 387,245         |   |  |                                | 19.59
|                                              |  |                
|Granted                                       |  |                |   |  |                                |     
|Exercised                                     |  |                |   |  |                                |     
|Forfeited                                     |  | (45,593         | ) |  |                                | 19.95
|                                              |  |                 |   |  |                                |      
|Stock options outstanding at October 31, 2004 |  | 341,652         |   |  | $                              | 19.54
|                                              |  |                 |   |  |                                |      



At October 31, 2004,
the number, weighted-average exercise price and weighted-average remaining contractual life of outstanding options and the number and weighted-average exercise price of options currently exercisable are as follows:



|                         |  |                     |  |                                |       |                           |      |                  |         |                                |   |      
|------------------------ |  | ------------------- |  | ------------------------------ | ----- | ------------------------- | ---- | ---------------- | ------- | ------------------------------ | - | -----
|                         |  | Options outstanding |  | Options exercisable           
|Range of exercise
prices |  | Number ofoptions    |  | Weighted-averageexercise price |       | Remainingcontractual life |      | Number ofoptions |         | Weighted-averageexercise price
|                         |  |                     |  |                                |       | (in years)                |      |                  |         |                               
|$4.64                    |  | 5,000               |  | $                              | 4.64  |                           | 7.61 |                  | 2,500   |                                | $ | 4.64 
|$7.12 - $10.00           |  | 271,282             |  | $                              | 7.68  |                           | 7.28 |                  | 159,594 |                                | $ | 7.80 
|$13.36                   |  | 7,813               |  | $                              | 13.36 |                           | 1.33 |                  | 7,813   |                                | $ | 13.36
|$59.36 - $85.50          |  | 57,557              |  | $                              | 77.61 |                           | 2.11 |                  | 37,437  |                                | $ | 73.37



Included in total
options outstanding as of October 31, 2004 were 11,877 options to nonemployee sales representatives. The Company recorded compensation expense (benefit) of $363, $17,857, and $(1,377) related to these options for the fiscal years ended October 31,
2004, 2003 and 2002, respectively.



On December 30, 2003,
restricted stock awards under the Plan totaling 149,000 shares were approved by the Compensation Committee of the Board of Directors of the Company. The shares vest in equal amounts quarterly over almost four years. The first vesting date occurred
on January 31, 2004. The Company records compensation expense ratably over the vesting period equal to the number of shares multiplied by the closing price of the Companys common stock of $6.60 on the date of grant. The Company recorded
compensation expense totaling $240,479 during the fiscal year ended October 31, 2004 related to these restricted stock awards.



Restricted stock award activity under the Plan during the fiscal year ended October 31, 2004 is as follows:



|                                |  |                 |  
|------------------------------- |  | --------------- | -
|                                |  | Number ofShares |  
|Balance at October 31, 2003     |  |                |  
|Granted                         |  | 149,000         |  
|Forfeited or withheld for taxes |  | (9,978          | )
|                                |  |                 |  
|Balance at October 31, 2004     |  | 139,022         |  
|                                |  |                 |  



|   |  |                          
|-- |  | -------------------------
|33 |  | Optical Cable Corporation



---

On December 17, 2004 restricted stock awards under the Plan totaling 191,000 shares were approved by the
Compensation Committee of the Board of Directors of the Company. Generally, 80% of the shares will vest based on the passage of time, with the corresponding expense recognized ratably over the vesting period. The expense for the time-based shares
will equal the number of shares vested during a period multiplied by the closing price of $5.63 on the date of grant. The first vesting date for the time-based shares will be January 31, 2005 with the maximum vesting period being almost six years.
The remaining 20% of the shares are generally eligible to vest over six years if the management team is able to provide total shareholder return (in terms of increase in share price plus dividends) at least 20% greater than the return of the Russell
2000® index. Greater shareholder returns can
accelerate vesting, but the shares cannot vest more quickly than over four years. The first possible vesting date is October 31, 2005. Failure to meet the performance criteria required for vesting will result in the shares being forfeited. The
Company will recognize expense on the performance-based shares each quarter using an estimate of the shares expected to vest multiplied by the closing price of $5.63 on the date of grant. U.S. generally accepted accounting principles requires that
any previously recognized compensation cost shall not be reversed if the shares are forfeited as a result of not meeting the performance measure.



The Company adopted on March 9, 2004 the 2004 Non-employee Directors Stock Plan (the Non-employee Directors Stock Plan). The Non-employee
Directors Stock Plan authorizes the Board of Directors to pay all or a part of director fees, in the form of stock grants, to Board members who are not full time employees of the Company. The Company has reserved 250,000 shares of common stock for
issuance pursuant to awards under the Non-employee Directors Stock Plan. As of October 31, 2004, there were 244,000 remaining shares available for grant under the Non-employee Directors Stock Plan.



During the year ended October 31, 2004 restricted stock awards under the
Non-employee Directors Stock Plan totaling 6,000 shares were approved by the Board of Directors of the Company. The shares vested immediately upon grant. The Company recorded compensation expense equal to the number of shares multiplied by the
closing price of the Companys common stock on the date of grant. The Company recorded compensation expense totaling $30,510 during the year ended October 31, 2004.



|(9) | Business and Credit Concentrations, Major Customers and Geographic Information
|--- | ------------------------------------------------------------------------------



The Company has a single reportable segment for purposes of segment reporting. In addition, the Companys fiber optic
cable products are similar in nature. Therefore, the Company has disclosed enterprise-wide information about geographic areas and major customers below.



The Company provides credit, in the normal course of business, to various commercial enterprises, governmental entities and not-for-profit organizations.
Concentration of credit risk with respect to trade receivables is limited due to the Companys large number of customers. The Company also manages exposure to credit risk through credit approvals, credit limits and monitoring procedures.
Management believes that credit risks as of October 31, 2004 and 2003 have been adequately provided for in the financial statements.



For the year ended October 31, 2004, 16.0%, or approximately $6,931,000 of net sales were attributable to one major domestic distributor. No other single
customer or distributor accounted for more than 10% of net sales for the year ended October 31, 2004. As of October 31, 2004, no single customer or distributor had an outstanding balance payable to the Company in excess of 5% of total
shareholders equity.



For the year ended October 31,
2003, 14.9%, or approximately $6,104,000 of net sales were attributable to one major domestic distributor. The related trade accounts receivable for this distributor as of October 31, 2003 totaled approximately $1.4 million. No other single customer
or distributor accounted for more than



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 34



---

10% of net sales for the year ended October 31, 2003. As of October 31, 2003, no other single customer or
distributor had an outstanding balance payable to the Company in excess of 5% of total shareholders equity.



No single customer or distributor accounted for more than 10% of net sales for the year ended October 31, 2002.



For the years ended October 31, 2004, 2003 and 2002, approximately 81%, 81%,
and 77%, respectively, of net sales were from customers located in the United States, while approximately 19%, 19% and 23%, respectively, were from international customers. Net sales attributable to the United States and all foreign countries in
total for the years ended October 31, 2004, 2003 and 2002 were as follows:



|                               |  |                         |            |      |   |            |  |   |           
|------------------------------ |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                               |  | Years ended October 31,
|                               |  | 2004                    |            | 2003 |   | 2002      
|United States                  |  | $                       | 35,207,495 |      | $ | 33,449,218 |  | $ | 32,706,256
|All foreign countries in total |  |                         | 8,010,695  |      |   | 7,664,823  |  |   | 9,891,944 
|                               |  |                         |            |      |   |            |  |   |           
|Total net sales                |  | $                       | 43,218,190 |      | $ | 41,114,041 |  | $ | 42,598,200
|                               |  |                         |            |      |   |            |  |   |           



No individual foreign
country accounted for more than 10% of total net sales in fiscal years 2004, 2003 or 2002. In addition, none of the Companys long-lived assets are located outside the United States.



|(10) | Income Taxes
|---- | ------------



Total income tax expense (benefit) for the years ended October 31, 2004, 2003 and 2002 was allocated as follows:



|                                                                               |  |                         |         |      |   |          |      |  |   |          |  
|------------------------------------------------------------------------------ |  | ----------------------- | ------- | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                               |  | Years ended October 31, |        
|                                                                               |  | 2004                    |         | 2003 |   |          | 2002 | 
|Income from operations                                                         |  | $                       | 363,946 |      | $ | (122,962 | )    |  | $ | (67,891  | )
|Shareholders equity, for disqualifying disposition of stock options exercised |  |                         |        |      |   |         |      |  |   | (57,412  | )
|                                                                               |  |                         |         |      |   |          |      |  |   |          |  
|                                                                               |  | $                       | 363,946 |      | $ | (122,962 | )    |  | $ | (125,303 | )
|                                                                               |  |                         |         |      |   |          |      |  |   |          |  



Income tax expense
(benefit) attributable to income from operations for the years ended October 31, 2004, 2003 and 2002 consists of:



|                                   |  |         |          |   |          |   |          |       |  |   |          |  
|---------------------------------- |  | ------- | -------- | - | -------- | - | -------- | ----- |  | - | -------- | -
|Fiscal year ended October 31, 2004 |  | Current |          |   | Deferred |   |          | Total | 
|U.S. Federal                       |  | $       | (15,109  | ) |          | $ | 347,113  |       |  | $ | 332,004  |  
|State                              |  |         | 910      |   |          |   | 31,032   |       |  |   | 31,942   |  
|                                   |  |         |          |   |          |   |          |       |  |   |          |  
|Totals                             |  | $       | (14,199  | ) |          | $ | 378,145  |       |  | $ | 363,946  |  
|                                   |  |         |          |   |          |   |          |       |  |   |          |  
|                                   |  |         |         
|Fiscal year ended October 31, 2003 |  | Current |          |   | Deferred |   |          | Total | 
|U.S. Federal                       |  | $       | 135,310  |   |          | $ | (242,354 | )     |  | $ | (107,044 | )
|State                              |  |         | 6,316    |   |          |   | (22,234  | )     |  |   | (15,918  | )
|                                   |  |         |          |   |          |   |          |       |  |   |          |  
|Totals                             |  | $       | 141,626  |   |          | $ | (264,588 | )     |  | $ | (122,962 | )
|                                   |  |         |          |   |          |   |          |       |  |   |          |  
|                                   |  |         |         
|Fiscal year ended October 31, 2002 |  | Current |          |   | Deferred |   |          | Total | 
|U.S. Federal                       |  | $       | (261,254 | ) |          | $ | 240,467  |       |  | $ | (20,787  | )
|State                              |  |         | (99,248  | ) |          |   | 52,144   |       |  |   | (47,104  | )
|                                   |  |         |          |   |          |   |          |       |  |   |          |  
|Totals                             |  | $       | (360,502 | ) |          | $ | 292,611  |       |  | $ | (67,891  | )
|                                   |  |         |          |   |          |   |          |       |  |   |          |  



|   |  |                          
|-- |  | -------------------------
|35 |  | Optical Cable Corporation



---

Reported income tax expense (benefit) for the years ended October 31, 2004, 2003 and 2002 differs from
the expected tax expense, computed by applying the U.S. Federal statutory income tax rate of 34% to income before income tax expense (benefit) in 2004 and 2003 and applying the U.S. Federal statutory income tax rate of 35% to income
before income tax benefit in 2002, as follows:



|                                                            |  |                         |         |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                            |  | Years ended October 31, |        
|                                                            |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|Expected tax expense                                      |  | $                       | 378,766 |   |      | $ | 65,159   |      |  | $ | 75,444   |  
|Increase (reduction) in income tax expense resulting from:  |  |                         |         |   |      |   |          |      |  |   |          |  
|Benefits from extraterritorial income exclusion             |  |                         | (91,781 | ) |      |   | (208,165 | )    |  |   | (119,213 | )
|State income taxes, net of federal benefit (expense)        |  |                         | 22,316  |   |      |   | (15,272  | )    |  |   | 2,191    |  
|Decrease in the valuation allowance for deferred tax assets |  |                         |        |   |      |   |         |      |  |   | (62,604  | )
|Other differences, net                                      |  |                         | 54,645  |   |      |   | 35,316   |      |  |   | 36,291   |  
|                                                            |  |                         |         |   |      |   |          |      |  |   |          |  
|Reported income tax expense (benefit)                       |  | $                       | 363,946 |   |      | $ | (122,962 | )    |  | $ | (67,891  | )
|                                                            |  |                         |         |   |      |   |          |      |  |   |          |  



The significant
components of deferred income tax expense (benefit) attributable to income from operations for the years ended October 31, 2004, 2003 and 2002 are as follows:



|                                                                                       |  |                         |         |      |   |          |      |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                       |  | Years ended October 31, |        
|                                                                                       |  | 2004                    |         | 2003 |   |          | 2002 | 
|Deferred tax expense (benefit) (exclusive of the effects of the other component below) |  | $                       | 378,145 |      | $ | (264,588 | )    |  | $ | 355,215 |  
|Decrease in the valuation allowance for deferred tax assets                            |  |                         |        |      |   |         |      |  |   | (62,604 | )
|                                                                                       |  |                         |         |      |   |          |      |  |   |         |  
|                                                                                       |  | $                       | 378,145 |      | $ | (264,588 | )    |  | $ | 292,611 |  
|                                                                                       |  |                         |         |      |   |          |      |  |   |         |  





|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 36



---

The tax effects of temporary differences that give rise to significant portions of the Companys
deferred tax assets and deferred tax liabilities as of October 31, 2004 and 2003 are presented below:



|                                                                                                                                                               |  |             |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                               |  | October 31, |           
|                                                                                                                                                               |  | 2004        |            |   | 2003 |  
|Deferred tax assets:                                                                                                                                           |  |             |            |   |      |   |            |  
|Accounts receivable, due to allowances for doubtful accounts and sales returns                                                                                 |  | $           | 212,986    |   |      | $ | 203,841    |  
|Inventories, due to allowance for damaged and slow-moving inventories and additional costs inventoried for tax purposes pursuant to the Tax
Reform Act of 1986 |  |             | 294,638    |   |      |   | 782,268    |  
|Net operating loss carryforward                                                                                                                                |  |             | 370,865    |   |      |   |           |  
|Capital loss carryforward and unrealized net loss on trading securities                                                                                        |  |             | 3,997,218  |   |      |   | 3,997,218  |  
|Fair value of warrants, deductible for tax purposes when exercised                                                                                             |  |             | 417,280    |   |      |   | 419,613    |  
|Liabilities recorded for loss contingencies, deductible for tax purposes when paid                                                                             |  |             | 53,921     |   |      |   | 144,967    |  
|Other                                                                                                                                                          |  |             | 87,473     |   |      |   | 36,768     |  
|                                                                                                                                                               |  |             |            |   |      |   |            |  
|Total gross deferred tax assets                                                                                                                                |  |             | 5,434,381  |   |      |   | 5,584,675  |  
|                                                                                                                                                               |  |            
|Less valuation allowance                                                                                                                                       |  |             | (3,997,218 | ) |      |   | (3,997,218 | )
|                                                                                                                                                               |  |             |            |   |      |   |            |  
|Net deferred tax assets                                                                                                                                        |  |             | 1,437,163  |   |      |   | 1,587,457  |  
|                                                                                                                                                               |  |            
|Deferred tax liabilities:                                                                                                                                      |  |             |            |   |      |   |            |  
|Plant and equipment, due to differences in depreciation and capital gain recognition                                                                           |  |             | (601,768   | ) |      |   | (354,971   | )
|Other receivables, due to accrual for financial reporting purposes                                                                                             |  |             | (30,149    | ) |      |   | (65,999    | )
|Other                                                                                                                                                          |  |             | (16,904    | ) |      |   |           |  
|                                                                                                                                                               |  |             |            |   |      |   |            |  
|Total gross deferred tax liabilities                                                                                                                           |  |             | (648,821   | ) |      |   | (420,970   | )
|                                                                                                                                                               |  |             |            |   |      |   |            |  
|Net deferred tax asset                                                                                                                                         |  | $           | 788,342    |   |      | $ | 1,166,487  |  
|                                                                                                                                                               |  |             |            |   |      |   |            |  



As of October 31,
2004 and 2003, the Company has assessed the realizability of its deferred tax asset relating to the capital loss carryforward generated by the sale of the Companys trading securities during the fiscal year ended October 31, 2001. The Company
has determined that, based on the tax planning strategies available as of October 31, 2004, it is more likely than not that this deferred tax asset totaling $3,997,218 as of October 31, 2004 and 2003, respectively, will not be realized. In addition,
the capital loss carryforward may be limited due to certain stock ownership changes. Accordingly, the Company has recorded a valuation allowance for deferred tax assets in the amount of $3,997,218 as of October 31, 2004 and 2003, respectively. A
decrease in the valuation allowance of $62,604 is included in income tax benefit for the fiscal year ended October 31, 2002. In order to fully realize this deferred tax asset, the Company would need to generate future taxable capital gains of
approximately $11.1 million prior to the expiration of the capital loss carryforward in 2006. The Company will consider tax planning strategies that may be determined to be available in the future in order to realize this benefit to the extent
possible.



Based on the Companys historical and
projected pretax earnings and other relevant factors, management believes that it is more likely than not that the Companys other deferred tax assets will be realized.



During the year ended October 31, 2004, the Company generated a net operating loss carryforward totaling $1,030,459. The net
operating loss carryforward will expire in 2024, to the extent it is not utilized.



|   |  |                          
|-- |  | -------------------------
|37 |  | Optical Cable Corporation



---

|(11) | Fair Value of Financial Instruments
|---- | -----------------------------------



The carrying amounts reported in the balance sheet for cash, trade accounts receivable, other receivables, and accounts payable and accrued expenses,
including accrued compensation and payroll taxes and income taxes payable, approximate fair value because of the short maturity of these instruments.



|(12) | Net Income Per Share
|---- | --------------------



The following is a reconciliation of the numerators and denominators of the net income per share computations for the periods presented:



|                                              |  |                       |         |                     |           |                 |   |     
|--------------------------------------------- |  | --------------------- | ------- | ------------------- | --------- | --------------- | - | ----
|Fiscal year ended October 31, 2004            |  | Net income(numerator) |         | Shares(denominator) |           | Per shareamount
|Basic net income per share                    |  | $                     | 750,072 |                     | 5,587,042 |                 | $ | 0.13
|                                              |  |                       |         |                     |           |                 |   |     
|Effect of dilutive stock options and warrants |  |                       |        |                     | 30,788    |                 |   |     
|                                              |  |                       |         |                     |           |                 |   |     
|Diluted net income per share                  |  | $                     | 750,072 |                     | 5,617,830 |                 | $ | 0.13
|                                              |  |                       |         |                     |           |                 |   |     
|                                              |  |                       |        
|Fiscal year ended October 31, 2003            |  | Net income(numerator) |         | Shares(denominator) |           | Per shareamount
|Basic net income per share                    |  | $                     | 314,607 |                     | 5,736,404 |                 | $ | 0.05
|                                              |  |                       |         |                     |           |                 |   |     
|Effect of dilutive stock options and warrants |  |                       |        |                     | 7,952     |                 |   |     
|                                              |  |                       |         |                     |           |                 |   |     
|Diluted net income per share                  |  | $                     | 314,607 |                     | 5,744,356 |                 | $ | 0.05
|                                              |  |                       |         |                     |           |                 |   |     
|                                              |  |                       |        
|Fiscal year ended October 31, 2002            |  | Net income(numerator) |         | Shares(denominator) |           | Per shareamount
|Basic net income per share                    |  | $                     | 283,446 |                     | 6,928,845 |                 | $ | 0.04
|                                              |  |                       |         |                     |           |                 |   |     
|Effect of dilutive stock options              |  |                       |        |                     | 457       |                 |   |     
|                                              |  |                       |         |                     |           |                 |   |     
|Diluted net income per share                  |  | $                     | 283,446 |                     | 6,929,302 |                 | $ | 0.04
|                                              |  |                       |         |                     |           |                 |   |     



Stock options that
could potentially dilute net income per share in the future that were not included in the computation of diluted net income per share (because to do so would have been antidilutive for the periods presented) totaled 336,653, 382,245, and 410,311 for
the years ended October 31, 2004, 2003 and 2002, respectively.



|(13) | Shareholders Equity
|---- | --------------------



On January 10, 2003, the Company repurchased 1,475,867 shares, or 21.3% of its outstanding common stock, no par value, for $2.00 per share in a privately
negotiated transaction. The cost of the transaction including brokerage fees, totaled $3,032,907.



On November 2, 2001, the Board of Directors of the Company adopted a Shareholder Rights Plan (the Rights Plan) and declared a dividend of one preferred
share purchase right (a Right) on each outstanding share of common stock. Under the terms of the Rights Plan, if a person or group who is deemed an Acquiring Person as defined in the Rights Plan acquires 15% (or other applicable percentage, as
provided in the Rights Plan) or more of the outstanding common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Rights then current exercise price, a number of shares of common
stock having a market value of twice such price. In addition, if the Company is acquired in a merger or other business transaction after a person or group who is deemed an Acquiring Person has acquired such percentage of the outstanding common
stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Rights then current exercise price, a number of the acquiring companys common shares having a market value of twice such
price.



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 38



---

Upon the occurrence of certain events, each Right will entitle its holder to buy one one-thousandth of a
Series A preferred share (Preferred Share), at an exercise price of $200, subject to adjustment. Each Preferred Share will entitle its holder to 1,000 votes and will have an aggregate dividend rate of 1,000 times the amount, if any, paid to holders
of common stock. The Rights will expire on November 2, 2011, unless the date is extended or unless the Rights are earlier redeemed or exchanged at the option of the Board of Directors for $0.0001 per Right. Generally, each share of common stock
issued after November 5, 2001 will have one Right attached. The adoption of the Rights Plan has no impact on the financial position or results of operations of the Company.



The Company has reserved 100,000 of its authorized preferred stock for issuance upon exercise of the Rights.



|(14) | Contingencies
|---- | -------------



On January 3, 2003, the bankrupt estate of Anicom, Inc., a former customer that is in chapter 11 bankruptcy, filed a complaint against the Company in the
United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the Complaint). The Complaint sought to avoid and recover certain alleged preferential payments for products in the approximate amount of $1,100,000
made to the Company during the 90-day period preceding Anicoms bankruptcy filing. The bankrupt estate of Anicom and the Company reached an agreement to settle this claim in April 2004. The terms of the settlement provided that the Company pay
$10,000 in full settlement of the claim and that the Company be allowed an unsecured non-priority claim against the bankrupt estate in the same amount. On April 26, 2004, the Company paid $10,000 into an escrow account pending court approval of the
settlement. On June 8, 2004, the Court approved the settlement.



From time to time, the Company is involved in various other claims, legal actions and regulatory reviews arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters is not expected to
have a material adverse effect on the Companys financial position, results of operations or liquidity.



|(15) | Quarterly Results of Operations (Unaudited)
|---- | -------------------------------------------



The following is a summary of the unaudited quarterly results of operations for the years ended October 31, 2004 and 2003:



|                                              |  |               |           |   |          |   |            |  |   |            |   |  |   |           
|--------------------------------------------- |  | ------------- | --------- | - | -------- | - | ---------- |  | - | ---------- | - |  | - | ----------
|                                              |  | Quarter ended
|Fiscal year ended October 31, 2004            |  | January 31    |           |   | April 30 |   | July 31    |  |   | October 31
|Net sales                                     |  | $             | 9,349,607 |   |          | $ | 10,652,998 |  | $ | 11,265,029 |   |  | $ | 11,950,556
|Gross profit                                  |  |               | 3,644,502 |   |          |   | 4,174,610  |  |   | 4,570,428  |   |  |   | 4,313,537 
|Income before income taxes                    |  |               | 68,022    |   |          |   | 88,092     |  |   | 492,160    |   |  |   | 465,744   
|Net income                                    |  |               | 44,106    |   |          |   | 57,002     |  |   | 317,787    |   |  |   | 331,177   
|Basic and diluted net income per share        |  |               | 0.01      |   |          |   | 0.01       |  |   | 0.06       |   |  |   | 0.05      
|                                              |  |               |           |  
|Fiscal year ended October 31, 2003            |  | January 31    |           |   | April 30 |   | July 31    |  |   | October 31
|Net sales                                     |  | $             | 9,746,015 |   |          | $ | 9,758,672  |  | $ | 10,259,907 |   |  | $ | 11,349,447
|Gross profit                                  |  |               | 3,497,835 |   |          |   | 3,854,264  |  |   | 3,017,237  |   |  |   | 4,240,074 
|Income (loss) before income taxes             |  |               | (220,321  | ) |          |   | 192,405    |  |   | (218,184   | ) |  |   | 437,745   
|Net income (loss)                             |  |               | (152,022  | ) |          |   | 132,759    |  |   | (71,344    | ) |  |   | 405,214   
|Basic and diluted net income (loss) per share |  |               | (0.02     | ) |          |   | 0.02       |  |   | (0.01      | ) |  |   | 0.07      



|   |  |                          
|-- |  | -------------------------
|39 |  | Optical Cable Corporation



---

Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

Optical Cable Corporation:



We have audited the accompanying balance sheets of Optical Cable Corporation as of October 31, 2004 and 2003, and the related statements of operations,
shareholders equity, and cash flows for each of the years in the three-year period ended October 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.



We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Optical Cable Corporation
as of October 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2004, in conformity with U.S. generally accepted accounting principles.



/s/ KPMG LLP



Roanoke, Virginia

December 17, 2004



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 40



---

Managements Statement of Responsibility



Management of the Company is responsible for the preparation and fair presentation of the
financial statements and other financial information contained in this report. The accompanying financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and
judgments by management. Other financial information contained in this annual report is presented on a basis consistent with the financial statements unless otherwise indicated.



To ensure the integrity, objectivity and fairness of the information in these financial statements, management of the Company has
established and maintains internal controls. The internal controls are designed to provide reasonable assurance that assets are safeguarded and transactions are executed, recorded and reported in accordance with managements intentions and
authorizations and to comply with applicable laws and regulations. The internal control system includes an organizational structure that provides appropriate delegation of authority and segregation of duties and management review. To enhance the
reliability of internal controls, management recruits and trains highly qualified personnel, and maintains sound risk management practices.



There are inherent limitations in any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even
effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.



The accompanying financial statements have been audited by KPMG LLP, independent registered
public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States). In planning and performing its financial statement audit, KPMG LLP considered the Companys internal control in order to
determine the nature, timing and extent of its audit procedures for the purpose of expressing an opinion on the financial statements and not to provide assurance on internal control. KPMG LLP reviews the results of its audit with both management and
the Audit Committee of the Board of Directors (the Audit Committee).



The Companys financial reporting and internal controls are under the general oversight of the Board of Directors, acting through the Audit Committee. The Audit Committee meets periodically with management and KPMG LLP, and KPMG LLP
has direct and unrestricted access to the Audit Committee at all times. The Audit Committee determines that management is fulfilling its responsibilities and supports actions to identify, measure and control risks and augment internal controls.



|                        |  |  |  |                        
|----------------------- |  |  |  | -----------------------
|/s/ Neil D. Wilkin, Jr. |  |  |  | /s/ Tracy G. Smith     
|Neil D. Wilkin, Jr.     |  |  |  | Tracy G. Smith         
|President &             |  |  |  | Vice President &       
|Chief Executive Officer |  |  |  | Chief Financial Officer
|                        |  | 
|January 26, 2005        |  |  |  |                        



|   |  |                          
|-- |  | -------------------------
|41 |  | Optical Cable Corporation



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OPTICAL CABLE CORPORATION



Corporate Information



Corporate Headquarters

Optical Cable
Corporation

5290 Concourse Drive

Roanoke, VA 24019



Legal Counsel

Woods Rogers PLC

10 South Jefferson Street

Suite 1400

Roanoke, VA 24011



and



McGuireWoods LLP

One James Center

901 East Cary Street

Richmond, VA 23219



Independent Registered Public Accounting Firm

KPMG LLP

10 South Jefferson Street

Suite 1710

Roanoke, VA 24011



Transfer Agent

Wachovia Bank, N.A.

1525 West W. T. Harris Boulevard, 3C3

Charlotte, NC 28262



Form 10-K Report



Shareholders may obtain, without charge, a copy of Optical Cable
Corporations Form 10-K, including exhibits, as filed with the Securities and Exchange Commission. Write to Optical Cable Corporation, P.O. Box 11967, Roanoke, VA 24022-1967, attention Ms. Tracy G. Smith, Corporate Secretary. Additionally, our
SEC filings are available to the public on the SEC Internet site (http://www.sec.gov).



Annual Meeting



The 2005 annual meeting of shareholders will
be held at 10:00 a.m. on Tuesday, March 29, 2005, at the Wachovia Tower, 10 S. Jefferson Street, 9thfloor training
room, Roanoke, Virginia.



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 42



---

Corporate Information



Common Stock and Dividend Data



Our common stock is traded on the Nasdaq National Market under the symbol OCCF. As of October 31, 2004 and December 31, 2004, there were approximately 7,800 shareholders
of record. On January 14, 2005 our common stock closed at a price of $5.31 per share.



The following table sets forth for the fiscal periods indicated the high and low bid prices of our common stock, as reported on the Nasdaq National Market, during the two most recent fiscal years:



|                                   |  |                     |      |     |   |     
|---------------------------------- |  | ------------------- | ---- | --- | - | ----
|                                   |  | Range of Bid Prices
|Fiscal year ended October 31, 2004 |  | High                |      | Low
|First Quarter                      |  | $                   | 8.80 |     | $ | 5.02
|Second Quarter                     |  | $                   | 8.37 |     | $ | 4.92
|Third Quarter                      |  | $                   | 6.09 |     | $ | 4.11
|Fourth Quarter                     |  | $                   | 5.00 |     | $ | 3.30
|                                   | 
|                                   |  | Range of Bid Prices
|Fiscal year ended October 31, 2003 |  | High                |      | Low
|First Quarter                      |  | $                   | 3.85 |     | $ | 1.81
|Second Quarter                     |  | $                   | 4.95 |     | $ | 2.60
|Third Quarter                      |  | $                   | 8.44 |     | $ | 4.41
|Fourth Quarter                     |  | $                   | 7.99 |     | $ | 6.00



We have not paid or declared any cash
dividends on our common stock since our initial public offering in 1996 and do not expect to pay any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business.



We did declare a rights dividend in connection with the adoption of our
shareholders rights plan on November 2, 2001. See Note 13 to the financial statements for additional details.



|   |  |                          
|-- |  | -------------------------
|43 |  | Optical Cable Corporation



---

OPTICAL CABLE CORPORATION



Corporate Information



|                                                |  |                                                             
|----------------------------------------------- |  | ------------------------------------------------------------
|Executive Officers of Optical Cable Corporation |  |                                                             
|                                                | 
|Neil D. Wilkin, Jr.                             |  | Chairman of the Board, President and Chief Executive Officer
|                                                | 
|Luke J. Huybrechts                              |  | Senior Vice President of Operations                         
|                                                | 
|Charles W. Carson                               |  | Senior Vice President of Marketing and Sales                
|                                                | 
|Tracy G. Smith                                  |  | Vice President and Chief Financial Officer                  
|                                                | 
|Board of Directors of Optical Cable Corporation |  |                                                             
|                                                | 
|Randall H. Frazier                              |  | President and Founder                                       
|                                                |  | R. Frazier, Incorporated                                    
|                                                | 
|John M. Holland                                 |  | President and Founder                                       
|                                                |  | Cybermotion                                                 
|                                                | 
|Luke J. Huybrechts                              |  | Senior Vice President of Operations                         
|                                                |  | Optical Cable Corporation                                   
|                                                | 
|Craig H. Weber                                  |  | Managing Partner                                            
|                                                |  | Hollymeade Group, LLC                                       
|                                                | 
|Neil D. Wilkin, Jr.                             |  | Chairman of the Board, President and Chief Executive Officer
|                                                |  | Optical Cable Corporation                                   
|                                                | 
|John B. Williamson, III                         |  | Chairman of the Board, President and Chief Executive Officer
|                                                |  | RGC Resources, Inc.                                         



|                          |  |   
|------------------------- |  | --
|Optical Cable Corporation |  | 44